How FSAs Maximize Your Employment Benefits
Flexible spending accounts, 401(k) plans, Section 125 cafeteria plans (which have nothing to do with eating at work!), group insurance plans, and vacation benefits are some of the things your employer may offer as part of your benefits package. These types of incentives can make your job more valuable, beyond what you're taking home in a paycheck. But, employer benefit plans can sometimes be confusing for the average worker to understand.
Flexible spending plans can be particularly tricky to master if you've never used one before. This guide explains what a Flexible Spending Account is and how it works so you can make the most of yours.
What Is a Flexible Spending Account?
A Flexible Spending Account (FSA), also called a flex plan or reimbursement account is an employer-sponsored benefit that allows you to pay for eligible medical expenses on a pre-tax basis (there are also similar accounts for dependent and child-care expenses).
If you expect to incur medical expenses that won't be reimbursed by your regular health insurance plan, you should be taking advantage of your employer's FSA if one is offered. Why? The short answer is tax savings.
An FSA saves you money by reducing your income taxes. The contributions you make to a Flexible Spending Account are deducted from your pay before your federal, state, or Social Security Taxes are calculated and are never reported to the IRS. The end result is that you decrease your taxable income and increase your spendable income. You can save hundreds or even thousands of dollars a year by contributing to an FSA.
How Does an FSA Work?
At the beginning of the plan year (which usually starts January 1st), your employer asks you how much money you want to contribute for the year. For 2021, you can add $2,750 to a health FSA. The limit increases to $5,000 for dependent care FSAs.
You have only one opportunity a year to enroll unless you have a qualified "family status change," such as marriage, birth, divorce, or loss of a spouse's insurance coverage. The amount you designate for the year is taken out of your paycheck in equal installments each pay period and placed in a special account by your employer.
As you incur medical expenses that are not fully covered by your insurance, you submit a copy of the Explanation of Benefits or the provider's invoice and proof of payment to the plan administrator, who will then issue you a reimbursement check.
FSA benefits are typically use it or lose it, and any unused money in your FSA doesn't roll over to the next year. Due to COVID-19, however, FSA benefits from 2020 can be rolled into 2021, and benefits from 2021 can be rolled to 2022. FSA benefits have also been extended to include over-the-counter medications without a prescription and menstrual products.
What Expenses Are Eligible for Reimbursement?
Any expense that is considered a deductible medical expense by the Internal Revenue Service and is not reimbursed through your insurance can be reimbursed through the Flexible Spending Account. Examples include:
- Fees paid to doctors, dentists, surgeons, chiropractors, psychiatrists, psychologists, and Christian Science practitioners
- Contact lenses and eyeglasses
- Fees for hospital services, qualified long-term care services, accident and health, and qualified long-term care insurance premiums, nursing services, laboratory fees, prescription medicines and drugs, and insulin.
- Acupuncture treatments
- In-patient treatment at a center for alcohol or drug addiction
- Smoking-cessation programs and prescribed drugs to help nicotine withdrawal
- False teeth, hearing aids, crutches, wheelchairs, and guide dogs for the blind or deaf
- Fees in excess of reasonable and customary amounts allowed by your insurance
- Cost of vasectomies, hysterectomies, and birth control
- Non-elective cosmetic surgery
- Co-payments on covered expenses
- Prescription drugs or prescription co-pays
Read over your FSA benefit documentation to make sure you know what is and isn't covered. Keep receipts for everything you spend that you plan to seek reimbursement for later.
Remember, an FSA Is Not an HSA
A Health Savings Account (HSA) is another health care savings account your employer might be offered. With this type of account, you can also save money for future health care expenses on a tax-advantaged basis. Contributions are tax-deductible, they grow tax-deferred and you can withdraw them for qualified medical expenses tax-free. HSAs are only offered if you have a high deductible health plan through your employer. The money you contribute can be invested in mutual funds or other investments so it can grow through the power of compounding interest.
If you have a choice between an FSA and an HSA at your job, here are two key things to keep in mind to help with decision-making:
- HSAs have higher annual contribution limits and allow employer matching contributions
- HSA benefits roll over from year to year
An HSA could be the better choice if you don't think you'll need to withdraw money for health care expenses in the near future. An FSA, on the other hand, might be more appropriate if you have certain recurring health care costs you need to pay each year that you want to snag a tax break for.