What is a Flexible Spending Account (FSA)?

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Another day, another acronym. Enter the FSA. We love all things health account related, FSA included. Let us help you understand the details of your Flexible Spending Account.

Another day, another acronym. Enter the FSA. We love all things health account related, FSA included. Let us help you understand the details of your Flexible Spending Account.

What is a Flexible Spending Account?

An FSA or Flexible Spending Account is a pre-tax health account (sometimes referred to as a medical FSA or health FSA)  that can be used to pay for eligible healthcare expenses.

In more technical terms, an FSA is provided by employers and gives eligible employees a tax-free account to save money for expected qualifying health expenses. Using an FSA can reduce your applicable income taxes and save you money on predicted health expenses. Unlike an HSA, FSAs have a “Use it of Lose it” provision. FSAs must be used within the same plan year or the individual forfeits all remaining money  (please note there are two exceptions to this rule including a grace period and carry-over provision, more details below). Additionally, you need to elect how much you want to contribute into your account at the beginning of every plan year – we know, not the easiest thing to do.

How to Qualify

Most full-time employees are eligible to enroll in an employer FSA. You do not need to enroll in your 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.

What happens to my FSA Contributions at Year End?

After year-end, money left over in an employee account will be turned over to the employer with two small exceptions:

1. Grace Period – An additional two and a half months (until March 15 assuming a plan year that starts on Jan 1) 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.

2. 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.

How it Works

Flexible Spending Account contribution limits are set annually by the IRS. 2017 has a pre-tax contribution limit of $2,600. Either an employer or employee can contribute to an FSA.  You can use an FSA to pay for any medical related expenses like copays, deductibles and other out-of-pocket costs (full list here).

With most providers, you can use your FSA debit card to pay for health-related expenses or upload receipts electronically for reimbursement.

Is it Right for Me?

An FSA is a great way to save pre-tax dollars for expected medical expenses for the coming year. Unlike an HSA, it provides no long-term value as extra money (besides carry over or grace period dollars) is forfeited each year. Be realistic with FSA contributions so you can maximize your pre-tax medical expenses dollars but limit any forfeited contributions at year-end.

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.

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