A Flexible Spending Account (FSA) is helpful if you have a healthcare plan and need a better way to pay for deductibles, copays, drugs not covered by prescription plans, and other healthcare costs that may not be covered by insurance. Basically, an FSA can save you money because you can use it to pay for some medical expenses with pre-tax funds you have set aside.
Facts About a Flexible Spending Account
FSAs can pay for medical and dental expenses for you and your dependents. The following is a list of the covered expenses:
- Prescription medications
- OTC medications if a doctor prescribes them
- Insulin reimbursements
- Medical equipment like bandages, crutches, glucometers, and glucose test strips
However, FSAs can’t be used to pay for insurance premiums.
An employee can put away $2,650 per year into their Flexible Spending Account. Married couples can put away $2,650 each. That’s potentially $5,300 that can be put away per married couple. Although the money must be used within the plan year, an employer can present one of two options to an employee in that regard:
- A 2½ month grace period can be granted so the money in the account can be used.
- Up to $500 can be carried over to the following plan year.
If the money isn’t used, even after the options offered by the employer, it can be lost. This makes it especially important to plan accordingly and not deposit more money into the account than you think you’ll need.
How to Set Up an FSA
An FSA can be set up for an employee through an employer. An employer may decide to set the yearly maximum at or less than $2,650 per year. The employer can also decide whether to offer grace periods or carryovers. A debit card can be set up for the employees to use their funds for qualifying costs.
There are different ways an employee can enroll:
- New hires can typically enroll through the employer within 60 days of the employment start and before Oct. 1.
- Life events can qualify a person for enrollment. These qualifying events are outlined by the IRS and include employment changes, divorce, a new child, or change in dependent eligibility.
- You can enroll within 30 days following the open enrollment period between Nov. 15 and Dec. 15. Late enrollment is only permitted when enrollment wasn’t possible during the open period.
Pros and Cons of FSAs
There are different pros and cons to FSAs. The pros include tax savings because the FSA contribution is a pre-tax deduction from the paycheck, better medical savings, the funds are immediately available through a debit card, and the money is there for unexpected medical expenses.
The cons include the limited amount of money that can be contributed, the loss of the money if it isn’t spent during the plan year, a short enrollment period, few enrollment opportunities, and medical expenses paid with an FSA can’t be written off on your tax return.
Although the potential for losing the money exists, having an FSA can save money and a lot of headaches when it comes to paying medical bills.