Flexible Spending Accounts (FSA) are an excellent way to help pay for healthcare and dependent care costs. Like all accounts, they have rules and regulations to know so you get the most bang for your buck.
Let’s go over a few rules that come with Flexible Spending Accounts.
What is a Flexible Spending Account (FSA)?
A Flexible Spending Account (FSA) is an account that allows you, as an employee, to contribute tax-free money to pay for eligible medical expenses.
There are two kinds of FSAs available to help pay for different types of expenses, including Healthcare and Dependent Care FSAs.
Healthcare FSAs are set up to help you use pre-tax dollars to pay for medical expenses such as:
- Health insurance deductibles
- Health insurance premiums
- Hearing aids
- Office visits or co-pays
- Transportation costs (to and from medical appointments)
Another type of FSA, also known as dependent care assistance (DCA or DCAP) helps you pay for any type of dependent care. Here are a few examples:
- Daycare and after school care for children under age 13
- In-home assistance, medical care, or nursing home care for a disabled or ill spouse
- In-home care, nursing home, or childcare for disabled or severely ill children of any age
- In-home caretaking, medical care, or senior home care for a disabled or ill parent
FSAs can also be used for adoption assistance.
How do I set up an FSA?
FSAs are exclusively employer-based plans. Typically you can set up an FSA when you begin working or during the yearly open enrollment period.
Unfortunately, those who are self-employed aren’t eligible for FSAs. Thankfully, there is another option called a Medical Savings Account you can look into if you are self-employed.
What are the contribution limits?
Each type of FSA has its own contribution limit.
For Health Care FSAs the 2019 maximum contribution is $2,700. Because FSA contributions work on an individual basis, each spouse in the household can contribute up to the 2019 limit.
For Dependent Care FSAs the 2019 maximum contribution is $5,000.
It’s important to note that these maximum contribution limits are what the IRS sets, not what your employer has to do. Be advised that employers do not have to apply the new limit to their 2019 plan, but may choose to, so check with your employer to see if they will be using the IRS limits.
What can I pay for with my FSA?
Thousands of items are available for purchase with your FSA account. Here are a few items you can use those pre-tax dollars on:
- Baby/Mom Care
- Diabetes Supplies
- Eye Care
- Family Planning
- First Aid
- Pain Relief
- Sun Care
- And more
You must use it, or you’ll lose it
One thing to keep in mind with FSAs is that they are a “use it or lose it” option. You’ll want to take some time to map out your future expenses to make sure an FSA is going to be a good option for you.
FSA money can only be used during the calendar year it is contributed. However, there are a couple of workarounds to know. Some FSAs offer a rollover option where you can roll up to $500 to the next year’s contribution. Other FSAs may offer a grace period that allows you to spend your FSA money for up to 2.5 months after the year ends. Since many plans start in January, you’d be able to spend your money up to March 15th. Keep in mind that companies don’t have to offer either of these options, so make sure to look closely at your plan and contribute the amount you think you’ll spend.
No double-dipping allowed
FSAs are not the onion dip at a party, but it is possible to “double-dip,” and you’ll get in trouble for it.
One way people double-dip is by paying for an FSA-eligible expense with their FSA card and then submit the same expense for reimbursement. Another example is if you and your spouse both have FSAs through your employer, and you pay for a co-payment or FSA-eligible expense and submit a claim under both accounts.
Another way to double-dip involves wellness plans. Wellness plans have become all the rage in recent years and have led to issues. Employees pay for wellness program fees with tax-free funds and then ask for a reimbursement. These programs are technically employer contributions and are not reimbursable through FSAs.
Double dipping is often an honest mistake. Be sure to keep your medical spending records accurate and organize receipts to prevent problems later.
If your employer offers an FSA, you may want to look into setting one up. It’s always nice to have help paying for things with pre-tax money. Just read the fine print to make sure you know the ins and outs of your specific plan.
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.