Most of us have health insurance through our employers. Most companies also offer Flexible Spending Accounts (FSA) that allow you to save money on healthcare expenses.
Is an FSA appropriate for you?
What is a Flexible Spending Account?
You can contribute to an FSA account through deductions from your paycheck. The amount is pre-tax, so you will save on taxes. The money in the FSA account can only be spent on eligible medical, dental or vision expenses for you and your dependents.
The administrator of the FSA account will typically send you a debit card. You can also submit documentation of your expenses and get reimbursed.
When Can You Sign Up For FSA?
You can sign up during your employer’s “Open Enrollment Period” or when you start a new job.
What can FSA funds be used for?
FSA funds can be used for medical expenses for you and your dependents. FSA funds can be used for:
Co-payments, co-insurance, and deductibles on your health insurance plan
Vision care, eyeglasses, contact lenses
What does FSA not cover?
You cannot use FSA funds for vitamins, gym memberships, insurance premiums, family counseling or cosmetic procedures such as dental whitening.
Here is a handy list of what is covered by FSA.
FSA Is “Use It or Lose It”
The money in your FSA account must be used by the end of the year and does not rollover. In other words, you will lose any unused funds. Some employers offer the ability to roll over some portion of the funds to the next year or give you a grace period of 2.5 months (till March 15 of the following year) to use the funds.
Employers are not required to offer the grace period or the rollover option. So please check with your employer to check if you have these options in your plan.
Who needs a Flexible Spending Account?
If you have predictable medical expenses, then FSA is right for you. Since the funds are pre-tax, you will also save money by funding the FSA.
If your medical expenses are unpredictable, the “use it or lose it” aspect of the FSA will make it unsuitable for you.
How much should you contribute?
The 2020 limit for FSA is $2,750. The amount you contribute depends on your anticipated expenses for the next year. Ideally, contribute slightly less than what you need to ensure that you don’t have any unused funds at the end of the year.
Health Savings Account (HSA) Vs Flexible Spending Account (FSA)
To have a Health Savings Account, you will need a high deductible health insurance plan. Like the FSA, HSA is also a tax-advantaged account.
HSA allows you to roll over funds from year to year. Contribution limits for HSAs are higher, and you can take the account with you when you leave an employer, unlike the FSA. Most plans allow investing HSA funds into investments that grow over time.
You cannot have both an FSA and an HSA. If you have an HSA, you can have a “limited purpose” FSA for dental and vision expenses.