What is a Flexible Spending Account (FSA)? Bank rate

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A Flexible Spending Account (FSA) is a type of savings account that can be used to cover the cost of healthcare or dependent care. This is an employer-sponsored account and differs from a Health Savings Account (HSA) in that regard. An FSA can also help consumers save on taxes because the money in the account is not taxable.

What is a flexible spending account?

An FSA is an employer-funded savings account that is non-taxable and used to pay for health care or long-term care costs. It earns no interest.

When you contribute to an FSA, the money is taken from your paycheck before any tax is deducted and is never taxed. The federal FSA program estimates that people with an FSA save an average of 30 percent on health care expenses.

It is also possible to spend more than is currently available in an FSA to cover expenses as long as the specified contribution is added to those expenses by the end of the year.

Employers can also contribute to an employee’s FSA up to the annual contribution limit, but are not required to do so.

How does an FSA work?

Workers can register with an FSA if offered by their employer. You set the contribution amount to be deducted from each paycheck up to the federal limit.

Funds in an FSA can be used throughout the year to cover qualifying expenses, but generally do not carry over after the year-end. Some employers may grant a grace period or carry over a small amount of money into the next year. Otherwise the remaining money is lost.

If you have eligible expenses, submit an application to the FSA plan administrator, along with proof of expenses and a statement that the expenses are not covered by your healthcare plan. Then the expense is reimbursed with money from the FSA balance. Most plans also include a debit card, which allows you to shop directly from the account and not have to get a refund.

IRS rules do not allow you to use FSA funds to pay insurance premiums. Only out-of-pocket expenses are eligible.

There are two types of FSAs – a Health FSA (HCFSA) and a Nursing FSA (DCFSA) – and the costs covered depend on the type of account you have.

health fsa

An HCFSA typically pays for medical, dental, and eye care expenses not covered by a healthcare plan.

With an HCFSA, employees can submit a claim for reimbursement either by check or direct deposit, or they can use an employer-supplied debit or credit card, which will be reimbursed without making a claim.

Most medical expenses are included in HCFSA-covered expenses, but cosmetic procedures and insurance premiums are not eligible. Some examples of qualifying healthcare expenses include:

  • prescribed over-the-counter medications
  • Insulin with or without a prescription
  • Dental and vision exam
  • cleaning the teeth
  • contact lenses and accessories
  • physical therapy
  • surgery
  • bandage
  • pregnancy test kit

A full list of eligible expenses is available on the IRS website.

dependent care fsa

A DCFSA can be used to pay for expenses related to caring for a child or dependent adult. The FSA may require receipts to reimburse all eligible expenses.

Some examples of eligible care costs are:

  • Care before and after school
  • babysitting costs
  • preschool
  • summer day camp
  • Day care for adults

How much can I contribute to an FSA?

You can contribute a maximum of $2,850 to an HCFSA each year. If you have a spouse, they can also contribute up to $2,850 per year to a separate FSA.

For DCFSAs, the maximum is $5,000 per year for individuals or couples.

Employer contributions are offset against these limits.

Any amount remaining in the FSA at the end of the year is normally forfeited unless the employer allows one of two transfer options. In the first option, the employer can grant a grace period of up to two and a half months during which the employee can still use any remaining FSA funds. The other option is to roll over up to $570 of the employee’s FSA balance into the next year.

Pros and cons of FSAs

professionals

  • Contributions are not taxable: The money taken from your paycheck for an FSA is not taxed, which also reduces your total taxable income and thus helps save on taxes.
  • You can spend more than the FSA credit: FSA reimburses employees for all reimbursable expenses as long as the contribution is sufficient to cover expenses through the end of the year.
  • Employers can double contributionsEmployers can contribute to an FSA so long as the total combined contribution does not exceed $2,850 for a Health FSA or $5,000 for a DCFSA.
  • FSA funds may pay for expenses not covered by insuranceFor example: you can use an FSA to cover co-payments.

defect

  • You can only use FSA funds for a limited timeContributions remaining with an FSA generally expire at the end of the year.
  • no account interestFunds cannot be invested in an FSA, unlike a Health Savings Account (HSA) which earns interest.
  • FSAs are owned by the employer: If you leave the employer funding your FSA, the funds in the FSA will be forfeited.

How is an FSA different from a Health Savings Account (HSA)?

Although both types of accounts are non-taxable savings accounts that can be used to meet healthcare expenses, FSAs differ from HSAs in several important ways, most notably who owns them. An FSA is owned by the employer while an HSA is owned by the employee. Because of this, an employee has more control over the account. They can change the contribution amount at any time, and whether they quit the job or retire, they keep the account.

Funds in an HSA do not expire at the end of the year, so unused balances carry over to the next year. HSAs also earn interest, unlike FSAs, so money can be invested in HSAs.

On the other hand, from an HSA you can only spend what is available in its current balance. An FSA works similarly to a loan in that you can pay qualifying expenses even if the funds are not available in your account. An HSA works more like a checking account.

If I have an HSA, can I also have an FSA?

As a rule, employees cannot have an HSA and an FSA at the same time. There is one exception that occurs when combining an HSA with a restricted FSA.

A limited FSA only covers dental and eye care. It may be used in conjunction with an HSA when the amount of qualifying expenses exceeds the amount available in the HSA balance.

For example, a worker who knows she will be having extensive dental work throughout the year may wish to open a limited FSA as it can be used to cover dental expenses even if the expenses are deducted from her account. be more. Then all dental care expenses are paid through her HSA and limited FSA, and she can deduct those amounts from her taxable income and save more.

ground level

Opening an FSA is a great way to save on taxes and prepare for healthcare costs. As with other types of savings accounts, you can deposit and withdraw money, but in this case, that money is deducted from your paycheck in a set amount and is not taxable. Check whether your employer also makes contributions.

Because the FSAs don’t allow unused funds to be carried forward at the end of the year, it’s important to underestimate how much you’ll have to deduct from your income to put into the account. If you prefer an account that does not have exhaustible balances, consider opening an HSA instead if your employer offers one.

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