Frequently asked questions
How much can I contribute to an FSA?
Flexible Spending Account contribution limits are set annually by the IRS. In 2020, the pre-tax contribution limit is $2,750, but an employer can choose to set a lower limit . Both an employer and employee can contribute to an FSA.
Unlike a Health Savings Account, there are no family contributions. However, both spouses or partners can have individual FSAs eligible for $2,750 each or up to their respective employers’ set limits. On top of that, employers can match employee FSA contributions. Employers may contribute an additional $2,750 for 2020 for a maximum of $5,500 per individual FSA account. There are some complexities here (for example, what an employer can match if the employee contributes less than $500 dollars). See full details here.
What can I use my FSA funds for?
Employees can use FSA funds to pay for any medical related expenses like copays, deductibles and other out-of-pocket costs. See full list here. Unlike a Health Savings Account, the full FSA fund amount is available for use on the first day of the plan year, rather than accumulating throughout the year.
How is my FSA funded?
FSAs are funded through payroll deductions. The full amount of our FSA is available immediately at the employees plan start date. The employer then deducts the contribution amount that the employee elects from the employee's paycheck.
What does it mean to substantiate an expense?
FSAs require that every expense is approved by the plan sponsor (typically your employer). This is because your employer is putting in place a plan that walks through all eligible expenses that the plan is allowed to pay for.
If you (as the employee) are utilizing pre-tax FSA funds on expenses that are not approved by the IRS, your employer could face penalties and fines by the IRS for non-compliance. As a result, if they can’t, with confidence, know that you spent your funds on qualified medical expenses, they will ask you for further documentation or proof so that the use of those funds were “substantiated”. This is what gives them the protection they need in case of an IRS audit.
Is an FSA tax-free?
Yes, employees elect how much to contribute into the account at the beginning of each plan year. Then, the total annual amount is deducted from the employees’ paycheck equally throughout the year. Any employer contributions are also tax-free.
Who can enroll in an FSA?
Most full-time employees are eligible to enroll in their employer’s FSA. An employee does not need to enroll in the employer’s healthcare to be eligible to enroll in their FSA. An FSA is not a healthcare plan but can be used in conjunction with a healthcare plan in the US.
Do my FSA funds rollover at the end of the year?
After year-end, any money left over in an employee FSA will be turned over to the employer with three small exceptions (these are are at the discretion of the employer):
- Grace Period: An additional two and a half months (until March 15th assuming a plan year that starts on January 1st) is granted to the employee for any new expenses that can be used from money in the FSA from the prior year. After the grace period, any remaining money will be turned over the employer.
- Carry-Over: Employees can roll over a maximum of $500 from plan year to plan year if allowed by his/her employer. Any additional dollars above $500 will be forfeited. Please note, the $500 maximum is in addition to the current year pre-tax contribution limit set by the IRS.
- Run-Out Period: This is the additional time, after the plan year ends, tha an employee can file a claim that occurred in that plan year.
An employer can only provide one of these two options (grace period or carry-over) at the end of the year - not both.
NOTE: Due to the Consolidated Appropriations Act of 2021, these rules differ for 2020 and 2021 plan years.
What happens to my FSA if I leave my job?
Once an employee leaves a job, any unused FSA funds will be returned to the employer. However, employees will have 90 days to submit any outstanding FSA eligible expenses.
What are Medical (Healthcare) FSA, Limited-Purpose FSA and Dependent Care FSA?
Medical (aka Healthcare) FSAs help employees pay for eligible medical, dental and vision expenses their insurance plans don’t cover. Unlike HSAs, FSAs don’t need to be paired with a specific health insurance plan, which is good news as employees have more freedom to choose the health plan that works for them.
Limited-Purpose FSAs can only be used for dental and vision expenses that employees’ health plans don’t cover. The rules for these accounts are similar (but not exactly the same) as the Healthcare FSAs. One of the major benefits of this FSA? You can contribute to a Limited-Purpose FSA and a health savings account (HSA) at the same time with no penalties.
A Dependent Care FSA is offered by employers to help employees save and pay for child and dependent care. It's meant to help employees pay for services that allow them to work when they would otherwise need to be at home fulfilling caretaking duties.
How is an FSA different from an HSA?
While both accounts can be used for qualified medical expenses, there are significant differences. A Flexible Spending Account (FSA) is fundamentally different from a Health Savings Account (HSA).
An FSA is a “use it or lose it” spending account, meaning you have a limited amount you can contribute each year, but if you don’t use the money in it, you will lose the ability to use it later (subject to limited carry forwards and a grace period). With an FSA, the account is also not yours, it is your employer’s. Additionally, you have to make an election at the beginning of each Plan Year to determine how much money you want to put away. An FSA can be used with almost any type of health insurance (low or high deductible).
An HSA on the other hand is your account and it is portable. Meaning if you decide to leave your employer, you can take all of the money in your account with you. You can also rollover your balances year-to-year, so there is no concept of “use it or lose it”. The contribution limits are also higher with an HSA versus an FSA, and you can make adjustments throughout the year. In addition to helping you save on qualified expenses, an HSA also accrues interest tax-free, and the funds can even be invested tax-free. Contributions to an HSA can only be made with an active qualifying Health Deductible Health Plan.