A Flexible Spending Account allows employees to put some of their income aside to later use for qualified medical expenses. The main perk of an FSA is that the funds contributed are not subject to income and payroll taxes. Both employees and employers can contribute to an FSA.
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Flexible Spending Account (FSA) Basics
Employers can offer a Flexible Spending Account, also known as Flexible Spending Arrangements, to their enrolled in a group health insurance plan. The employer is technically the account owner, so when you change jobs, you cannot carry the FSA over to your new employer. This is one of the main aspects that differentiate an FSA from an HSA.
Each year you can put up to $2,750 in your FSA to reduce your tax liability regardless of whether or not your employer also contributes. Although at the end of the year, only $550 can be rolled over to the next year, careful planning is necessary. Your employer can also decide to offer 2.5 more months to spend the leftover money instead of this.
Flexible Spending Account Eligible Expenses
There are certain Flexible Spending Account eligible expenses that can be paid for by your FSA called qualified medical expenses. Your FSA can pay for any qualified medical expense incurred by you or your spouse. Additionally, 59% of employers offered Flexible Spending Accounts that cover the expenses of dependents.
To name a few, Flexible Spending Account eligible expenses do include:
- Insurance co-payments and deductibles
- Qualified prescription drugs, including insulin and birth control
- Diagnostic tests and pregnancy tests
- Disease treatment and mitigation
- Preventive care, including vision and dental care
- Medical equipment such as bandages and crutches
- Smoking cessation programs
- Acupuncture and chiropractors
Flexible spending account eligible expenses do not include:
- Health insurance premiums
- Long term care
- Cosmetic surgeries
- Gym memberships
- Expenses covered by another health insurance plan
How the CARES Act of 2020 Changed FSA Rules
Amidst the Coronavirus pandemic, the Senate passed a $2.2 trillion aid package. The money was allocated for emergency financial relief to individuals, big corporations, small businesses, state and local governments, public health, and education with a small safety net.
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Aside from the direct cash payments, the CARES act expanded Flexible Spending Account eligible expenses. FSA funds can now be used for over-the-counter drugs like Advil and Tylenol, as well as menstrual care products.
How The American Rescue Plan Act Changed FSA Rules
Effective March 11, 2021, The American Rescue Plan Act is a $1.9 trillion economic stimulus plan signed by President Joe Biden. The American Rescue Plan Act increased the limits of dependent-care flexible spending accounts to $5,250 for an individual plan from $2,500.
Additionally, The American Rescue Plan Act temporarily allows rollover for unused funds for all FSA types. Under the new provisions, you can still access your accounts until the end of the year, even if you leave your employer. Note: these new rules are only applicable if your employer chooses to adopt them.
How to Use Your Flexible Spending Account
There are two main ways to access the money stored in your Flexible Spending Account and are determined by your employer's plan. The first is through a debit card issued to you as an employee to use for your medical expenses. You pay upfront using the card which withdraws the money directly from your account.
Otherwise, to use the money from your Flexible Spending Account for eligible expenses, there are certain steps you need to take to access the money. You will have to submit receipts and documentation for reimbursement. Be sure to check with your employer, but this is the general guide to using your FSA:
- Enroll in the FSA offered by your employer. You can contribute up to $2,650 per year on a pre-tax basis.
- When you visit your doctor or pharmacy, present your insurance card. Otherwise, keep a receipt of purchases/services used.
- Depending on your coverage, you will be charged a copay.
- To use the money stored away in your FSA for out-of-pocket costs, you need to submit a claim to the FSA through your employer. Each employer has its own procedure.
- You must prove the medical expense alongside a statement that your health insurance plan has not already covered it.
- Finally, you will receive reimbursement for the expense if eligible.
Reasons to Enroll in a Flexible Spending Account
Flexible Spending Accounts allow you to put away part of your income before tax deductions, lowering your taxable income. If you make regular contributions, having an FSA can lower your annual tax liability. According to William Sweetnam at Employers Council On Flexible Compensation, “These tools provide a means of budgeting for increased out-of-pocket health care costs and help many Americans pay for critical health care procedures that otherwise they may forgo.”
A survey conducted by Visa, Inc. found that 43 percent of the responders said they would probably/definitely cut back on medicines and treatments if they didn’t have an FSA. The type of treatments they would cut back on, in order of most to least, includes:
- Routine doctor visits
- Over-the-counter (OTC) medicines
- Sick doctor visits
Differences Between Tax-Advantaged Accounts
Currently, 103.5 million Americans benefit from tax-advantaged accounts, including Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs), and Health Reimbursement Arrangements (HRAs).
Health Savings Accounts (HSAs)
To start, a Health Savings Account is owned by an individual, not an employer, and can be carried over to a new employer if necessary. HSAs can also receive contributions from an employer. Money left in an HSA rolls over to the following year, while money in an FSA does not.
HSAs can be used to cover the eligible medical expenses for you and your family. Before age 65, there is a 20% penalty for funds used from an HSA for nonmedical purposes, but FSAs do not allow funds to be used for nonmedical purposes. All in all, HSAs allow more flexibility than FSAs, and to qualify; you need to be enrolled in a High Deductible Health Plan (HDHP).
Health Reimbursement Arrangements (HRAs)
Like an FSA, HRAs are offered through your employer, but only your employer can contribute money to the HRA. Health Reimbursement Arrangements are the only type of tax advantage account that can be used towards your insurance premium. Basically, your employer is giving you money to help with the costs of their insurance plan through an HRA.
Flexible Spending Account Frequently Asked Questions (FAQs)
As the cost of healthcare in the U.S. rises, there are many ways to save on your health needs. Below we elaborate on some of the most common questions regarding Flexible Spending Accounts to make care more affordable.
What are Flexible Spending Account eligible expenses?
Funds from your FSA can be used towards health insurance copayments and deductibles, but not premiums. Flexible spending account eligible expenses also include prescription drugs, and since the passage of The CARES Act of 2020, over-the-counter medications and menstrual care products. FSAs can also reimburse consumers for diagnostic services, medical devices, treatments, and preventive care.
What is the difference between an HSA and FSA?
A few main differences exist between an HSA and FSA regarding contribution limits, account ownership, and roll-over policies. FSAs are offered through your employer, while HSAs are used in conjunction with High Deductible Health Plans. Both types of accounts cover the medical expenses for spouses and dependents.
Should I take advantage of the FSA offered by my employer?
Every FSA policy is different, so it is important to become familiar with the one offered by your employer. Read through your employer-offered health care plan carefully because some are stricter than the guidelines established by the IRS. An FSA is a good decision for people who have ongoing healthcare expenses and can plan accordingly to not lose any of the money at the end of the year.
A Flexible Spending Account is a pre-tax benefit account offered by your employer and used for eligible medical expenses. These accounts are a smart way to save money on healthcare for you and your family. Freelancers, restaurant workers, contractors, and unemployed people need to seek alternative ways to save money on health services.
FSAs can save you money through tax benefits, but Mira can lower your healthcare spending regardless of your employment status. Anyone can enroll in Mira, a membership-based healthcare solution that provides access to $99 urgent care visits, up to 80% off prescription drug prices, and reduced gym memberships nationwide. Flexible spending accounts are not the only option for smart healthcare spending.