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Flexible Spending Account (FSA) 101: What you need to know

Even when you have health insurance, sometimes there are expenses that aren’t covered (also known as out-of-pocket expenses)—and those healthcare costs can be expensive. A flexible spending account (FSA) is one option available for people who have insurance through their employers. Here, learn everything you need to know about flexible spending accounts—what they are and how they can benefit you.

What is an FSA?

A flexible spending account, sometimes called a flexible spending arrangement, is a special savings account where you can deposit pretax money. Meaning, you don’t pay income taxes to the IRS on any amount you put into the account. 

The two most common types of FSAs are: 

  1. Healthcare or medical FSAs: Use these accounts for medical, dental, and vision expenses that are not covered, or are only partially covered by your insurance.
  2. Dependent care FSAs: Use these accounts to offset the cost of nursery school, daycare, after-school care, or elder care programs for qualified dependents. You must pay for these expenses first and then submit for reimbursement.

Some employers also choose to offer two other types of limited purpose FSAs, but they are less common:

  1. Individual premium reimbursement FSAs: Use these accounts to pay for non-employer sponsored medical premiums for you, spouse, or eligible dependents, such as individual dental/vision premiums, accident/disability premiums, cancer insurance premiums, or hospital indemnity coverage.
  2. Adoption assistance FSAs: Use for reimbursement of reasonable and necessary expenses that you incur in the process of legally adopting a child.

Participation in one type of FSA does not have any bearing on participation in another type, but may affect your eligibility to participate in a health savings account (HSA).

How does an FSA work?

FSAs are a great way to cover necessary expenses and to get a tax break along the way. But, there are rules about the money you save there, such as who can contribute, how much, and what you can spend the money on. 

Contribution limits

FSA accounts are only available through employers; some elect to contribute to their employees’ FSAs, but this is not required. For healthcare FSAs, in 2020 you can contribute a maximum of $2,750 annually, but that amount changes each year. For dependent FSAs, the annual total household maximum contribution is $5,000.

Rollover rules

In most FSAs, money not used by the end of the year is lost, so it is vital to plan how much you want to contribute based on estimates of what you think you will spend. There are exceptions to the use it or lose it rule, according to Kevin Haney, President of Growing Family Benefits. “Some companies can elect to offer one of two possible get-out-of-jail-free alternatives,” he says. These include:

  • A grace period of two months and 15 days
  • Carryover of $550 into the next plan year

“It would help if you weighed the risk of possible lost contributions against the potential tax savings,” Haney says.

Spending restrictions

You can only use the funds in your FSA to pay for eligible out-of-pocket costs. There are different types of expenses for which you can use your funds. They vary from state to state and from employer plan to plan. 

For medical FSAs, the general guideline for eligibility is that the expenses must help diagnose, treat, cure, or prevent a disease. The FSAfeds.com website has a search tool to check which kinds of Medical FSA expenses are eligible. It also explains what documentation, such as receipts, you need to verify your expenses’ eligibility. Some FSA providers will issue you a debit card that you can use to purchase items, others require you to submit receipts for reimbursement after payment.

Eligible expenses include copayments, deductibles, certain prescriptions or over-the-counter medications, and other medical supplies such as bandages, thermometers, or heating pads. The money in your account needs to be used by the end of the plan year, but you can use it to stock up on covered supplies for the upcoming year.

“The key to understanding what expenses are eligible is to remember this account is for out-of-pocket reimbursements,” explains Jim Pendergast, the senior vice president of The Southern Bank Company. “That means things you would typically have to pay for that your medical or dental insurance won’t, plus copayments and deductibles. The one big thing you cannot use your FSA for is health or dental insurance premiums.” Medical FSAs can not be used for:

  • Cosmetic surgery
  • Products without evidence they can treat or cure any illness, such as essential oils or juice cleanses
  • Wellness products like supplements or vitamins (Note: There are exceptions. Certain vitamins may be covered when prescribed by a physician, or deemed a medical necessity.)

For dependent care FSAs, funds must be used toward expenses for your children or other dependents you are at work, school, or looking for a job. They can include certain daycare, elderly care, preschool, and babysitting expenses. Parents and caretakers spend a large chunk of their monthly income dependent care expenses—an average of 8.8%. Not paying taxes on that much of your income is invaluable in helping with those costs.

FSA changes

Generally, once you decide how much you will deposit into your FSA each month, you can’t change your contribution rate until the open enrollment period each year. There are a few exceptions, special events when you can make adjustments: 

  • Change in marital status (marriage, divorce, or death of a spouse)
  • Change in number of dependents (birth or adoption of a child)
  • Change in residence
  • Change in employment that affects eligibility

If you lose your job or quit, money in your FSA goes to your employer unless you choose to continue health insurance through COBRA. You can also, theoretically, use your entire FSA fund at the start of the year, then leave your job before the remaining paycheck contributions occur. 

RELATED: No health insurance? Try these resources

Should I use an FSA?

FSAs have a number of benefits. You can save on taxes. For example, suppose you need inpatient care and have a $2,000 deductible. If you have a regular savings account and take a portion of your net pay to deposit it in the account, you paid income taxes on the money. But if you have an FSA, contributions are taken directly from your check, before taxes, and deposited into your account. Since health insurance deductibles are eligible expenses, you do not pay taxes when you withdraw the money to pay the hospital. You saved the amount of income taxes you would have paid on the $2,000.

The money you save is available as it’s deposited into your FSA. Meaning, if you sign up to save $230 a month, and have an appointment on Feb. 1, you could spend that amount on any eligible expenses. However, if you’re healthy and have low healthcare costs, it’s possible you could lose money: That’s the drawback to the “use it or lose it” system with an FSA. 

Before deciding if it’s right for you, it might help to review the list of eligible healthcare expenses and estimate how much you spend on these per year based on the past several years to determine your target amount to contribute to your FSA. To help you determine your contribution rate, you can use the FSA store online tool: FSA Calculator

If you’re worried about leaving unused funds in your account, you might want to consider a health savings account (HSA) instead. HSAs are different from FSAs. They are mostly used to cover medical expenses before you meet your insurance deductible, usually combined with high-deductible health plans. Typically you cannot participate in both an HSA and an FSA in the same year. There are different contribution rates, eligible expenses, and rules. For example, an HSA allows you to roll over funds from year to year. There is no “use it or lose it” rule, like with many FSAs. 

What can I use my leftover medical FSA funds on?

If you find yourself nearing the end of your plan year with money still left in your FSA, there are some ways to spend it before it’s gone:

  • Acupuncture
  • Blood tests
  • Blood pressure monitor
  • Braces
  • Braille books and magazines
  • Breast pumps and supplies
  • Chiropractic care
  • Cholesterol kits
  • Compression socks
  • Condoms
  • Conferences you attend for a medical condition
  • Contraceptives
  • Copays, coinsurance, deductibles
  • Cough drops and sore throat lozenges
  • CPAP machine and supplies
  • Home or personal defibrillator
  • Dental sealants and denture adhesives
  • Dental x rays
  • Denture cleaner
  • Diaper rash ointments
  • Feminine care products
  • FDA-approved diet programs
  • Eye drops
  • Gastrointestinal meds
  • Glasses, contact lenses, and contact lens care
  • Hair regrowth products
  • Hand sanitizer
  • Hearing aids and batteries
  • Immunizations not covered by your health insurance plan
  • Incontinence supplies
  • Insulin supplies
  • Lasik
  • Lice treatments
  • Lodging or meals incurred from medical treatments
  • Medical home remodeling
  • Prescriptions
  • Prescription sunglasses
  • Psychiatric care
  • Pulse oximeter—some healthcare providers have been suggesting these to their patients who have tested positive for COVID-19
  • Smoking cessation products
  • Spermicides
  • Sunscreen
  • Wheelchairs
  • Yearly checkups—annual physicals, eye exams, dental exams

If I have a medical FSA, can I still use SingleCare coupons?

Whether you have a medical FSA or not, using a SingleCare coupon may help you reduce the amount you pay for prescription and over-the-counter drugs. It only takes three easy steps. Search for the medications you take at singlecare.com. Save a SingleCare coupon. Then, pay for the medication using your FSA debit card—or submit the receipt for reimbursement from your FSA account.