Editor’s note: An earlier, and shorter version of this blog post was previously published. We published this update because knowing whether an FSA is worth it for you is the vital first step to taking advantage of their tax and cost savings.
A Flexible Spending Account (FSA) has benefits you want to pay attention to. These accounts use pre-tax money, from your paycheck, that you can use to pay for medical, dental, or vision care costs. Or child or adult day care services that allow you to work or look for work. The types of expenses that you can pay for with your FSA contributions will depend on the type of FSA plan you have.
Unlike a Health Savings Account (HSA), you don't need to buy a specific health insurance plan to open an FSA. In fact, you don’t have to maintain a health plan at all. But, your FSA must be offered through an employer-offered benefits program; you must not be eligible for Medicare, and if you have a Healthcare FSA you cannot contribute to an HSA at the same time.
Tax Benefits of a Flexible Spending Account
Regardless of the FSA account type, their pre-tax nature can result in many financial benefits. First, depositing pre-tax money from your paycheck lowers your gross income. By doing this, you can even lower your tax rate. Of course, this depends on where your annual income falls within your tax bracket.
Since your FSA contributions are pre-tax, the medical, dental, vision, or dependent care expenses also cost you less. That is when compared to paying for these expenses with after-tax income. This means you can save up to 30% on those expenses, depending on your tax bracket.
What Can I Buy with My FSA?
The types of eligible expenses your FSA contributions can pay for depending on the FSA account type. The three most common FSAs are Healthcare FSA, Limited Purpose FSA, and Dependent Care FSA. Here are examples of out-of-pocket costs that you can pay for with your contributions. Broken out by account type.
You can use your FSA contributions to pay for expenses for yourself, your spouse, and your dependents. This list is just an example of the qualified medical expenses for which you can use your Healthcare FSA contributions. For a complete list, read “Common Flexible Spending Account (FSA) Eligible Items.”
- Emergency care
- Medical supplies like bandages, antiseptic wash, joint braces, first aid kits, and more
- Medical aids like crutches, hearing aids, and more
- Over-the-counter drugs. Due to the CARES Act, these no longer need a prescription.
- Insulin refills. No prescription needed.
- Acupressure mats and other tools
- Menstrual care products. The CARES Act added these to the list of “qualified medical expenses.”
- Anything on the FSA Store
Limited Purpose FSA (for vision and dental care)
Limited Purpose FSAs can be active at the same time as an HSA. Taking advantage of both could give you a way to pay for vision and dental expenses using your FSA while saving your HSA money for the future.
- Teeth cleaning
- Vision tests
- Dental procedures like treatments for cavities, crowns, teeth grinding, and more
- Contact lenses
You can use your FSA contributions to pay for expenses for yourself, your spouse, and your dependents. Like the list provided for Healthcare FSAs, this list is not exhaustive. For a complete list of Limited Purpose FSA, IRS-approved expenses read “Common Flexible Spending Account (FSA) Eligible Items.”
Dependent Care FSA
For you to be eligible to contribute to a Dependent Care FSA, you must be the primary caretaker of minor children under the age of 13. And/or an adult-dependent who can't take care of themselves. In both cases, the eligible dependents must live in your home most of the time.
These expenses must be incurred while you work or look for work. That means you can't use contributions for date-night babysitters. Or care providers that allow you to volunteer. An added benefit is that you can maintain a Dependent Care FSA while contributing to an HSA.
Like the previously provided lists, this one is not completely representative of all of the expenses for which you can use your Dependent Care FSA contributions. For a more comprehensive list, read “Common Flexible Spending Account (FSA) Eligible Items.”
- Daycare for minor children under the age of 13
- After-school programs for minor children under the age of 13
- Summer programs for minor children under the age of 13
- Nanny for minor children under the age of 13
- Preschool fees
- Adult daycare programs for adult dependents who can’t take care of themselves
- In-home care services for adult dependents who can't take care of themselves
- Transportation costs for caretakers
Is Opening an FSA Worth It?
Did you read through the list of FSA-approved expenses and see something familiar? If you found items or services you know you'll need in the upcoming year, an FSA could be worth opening.
Remember, these expenses could be incurred by you, your spouse, or your dependents. By opening an FSA, not only will you save money by lowering your taxable income. But you will ensure that the money is socked away for when you need it during the plan year.
Be cautious because you could lose money left in your account on the last day of your plan. To avoid this, make sure you choose your funding election carefully.
There are only two cases where left-over funds could still be used after the last plan day. And only if your employer allows it.
First, employers can allow you to roll over up to $550 of your contribution in 2020 to 2021. Or, they could permit a 2.5 month grace period for you to use the remaining contribution. Either way, be sure to select your FSA contribution carefully so you don't lose any contributions at year-end.
Also, be sure your monthly household budget can afford the FSA contribution you elect. This is important because you won’t be able to change these elections until the following open enrollment period. Or unless you experience a qualifying life event like marriage, the birth of a child, or the death of a dependent.
As you can see there are many benefits to opening an FSA, regardless of account type. Only you can decide whether it’s worth it to you to open an FSA. If you have any questions about your employer’s specific plan(s), don’t hesitate to reach out to your HR Department.
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.