We all want help paying for our healthcare. Deductibles are higher than we’d like, we have copays to contend with, and our coinsurance responsibility after that deductible makes us nervous should we need a major procedure. Luckily, relief can come in the form of a Healthcare Flexible Savings Account (FSA).
Healthcare FSAs are savings accounts offered by your employer, to which you can contribute pre-tax dollars from your paycheck in order to pay for medical care, supplies, and other services. Since you don’t pay taxes on the money you use to pay for said health expenses, you can end up saving up to 30%, depending on your tax burden.
Some employers may choose to contribute money to their employees’ FSAs, but they aren’t required to. If your employer’s benefits package includes FSA contributions, you’re in luck! Employer contributions don’t count toward your yearly maximum for contributions.
Let’s dig into the details.
Basic Healthcare FSA Rules
- Annual contribution limits: In 2020, contributions can't exceed $2,750 per account. If you're married and both you and your spouse have an FSA, you can contribute $2,750 to each of your accounts. But if only one of you has an FSA, you cannot double your contributions ($5,500).
- Eligibility: You're eligible to contribute to an FSA if your employer offers one. You don't need to pair it with a specific health insurance plan, which gives you the ultimate flexibility to choose the right plan for you and your family while still benefiting from a tax-advantaged account.
- How long your savings last: You must use your FSA money within your plan year or else risk forfeiting what remains. Your employer may offer the option to either rollover $500 of contributions to the following year, or it may give you an additional 2 ½ month grace period during which you can use the remaining money, but not both. If your employer offers the rollover option and you take advantage of it, the money you rollover doesn’t affect your contribution limits for the following year.
- How you fund your FSA: During open enrollment, you will choose how much you’d like to contribute to your FSA and then your employer will take the appropriate amount out of each paycheck and deposit that money into your FSA. Your employer may also choose to deposit money into your FSA on your behalf.
- How to use your FSA: You will pay for the healthcare expense first, then submit the proper documentation to your plan administrator for reimbursement. Your reimbursement could come in the form of a check mailed to you or a direct deposit into your bank account.
What can Healthcare FSAs pay for?
You can use your Healthcare FSA to pay for a wide range of expenses including those associated with medical, dental and vision care. Here is a list of acceptable expenses for which you can use your FSA:
- Over-the-counter drugs as long as the employee's doctor has given them a prescription for said drugs (insulin refills don't need a prescription)
- Medical supplies and equipment like crutches and bandages
- Diagnostic devices like blood sugar kits
The people covered under your FSA includes: you, your spouse, your dependents, including children who are under 27 years of age at the end of the calendar year, and parents who are under your full-time care.
Things That Come Up:
Changing your Contribution amount mid-year.
You can only change the amount you contribute to your FSA outside of open enrollment if:
- You have a new eligible dependent such as a spouse or child (birth, adoption or placement for adoption), or in the case a dependent becomes an eligible tax-exemption (e.g. your parent moves into your home, you’re appointed the guardian of a minor).
- You’ve lost coverage under your spouse’s FSA due to death or divorce.
- Loss of dependent due to death or the dependent is no longer eligible (e.g. “ages out” of eligibility).
- Change in spouse’s employment status.
What if you also have an HSA?
If you have an HSA, you can continue to use the money from your HSA to pay for medical expenses, but you can't contribute to this account while you're contributing to an FSA.
A quick note for those who have both an HSA and a FSA: you can save your HSA money indefinitely, and thus use it as a retirement account. Since you lose your FSA money at the end of the year, it makes sense to use your FSA money first, that way you can preserve your HSA savings and earn interest.
Wrapping it all up
FSAs provide a vehicle for you to save and use pre-tax money to pay for healthcare expenses. This can help relieve the burden many feel as costs continue to rise, as well as enable those with HSAs to save that money for retirement. If your employer offers an FSA, talk to your HR department about how it can benefit your overall financial picture.
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.