A benefit that many employers offer in conjunction with their group plans is a flexible spending account, or FSA. But what is a flexible spending account? An FSA is a way to pay for medical services tax-free, but there are some drawbacks that you need to be aware of. In general, an FSA is a great benefit but one that can have you losing money if you are not careful.
Before We Start, Want a Great Way to Get Low Cost Doctor Visits?
How does a Flexible Spending Account Work?
A flexible spending account is set up by your employer and administered through a third party. At the beginning of the year, you decide how much money you want to contribute to the FSA, and that amount of money is then divided by the number of pay periods you receive in a year. The resulting amount is how much money you will contribute to your flex spending account each pay period. For example, if you get paid every month, and you want to contribute $2,400 per year, you would have $200 taken out of your pay check and placed in the FSA. The money that you contribute to the account is tax-free, meaning you reduce the amount of income taxes you pay, meaning you are able to pay for more medical services for a lesser amount.
After a medical service is incurred, the money can be deducted. There are two ways to do this. The first is with a debit card at the pharmacy or provider’s office. Not all plans include a debit card, so check with your employer. The other way to pay for a service through a flexible spending account is to submit a reimbursement form. In either case, be sure to keep all receipts, as many FSA reimbursements require them.
What Can Flexible Spending Account Funds be Used For?
Many people think that funds from a flexible spending account can only be used for medical services that are covered under your insurance plan. However, neither of those are true. FSA
funds can be used for medical, dental, and vision benefits. They can also be used for services that are not covered under the plan. So if you need laser eye surgery and it is not covered by your plan, you can use FSA funds to pay for it. That way, even though you have to pay full cost, you can get a discount through the tax-free advantages of a flexible spending account. You can find a full list of eligible services here.
Can Prescription Drugs be Purchased with FSA Funds?
Prescription drugs can be bought with FSA funds. However, over-the-counter meds are not eligible for the flexible spending account. Before the Patient Protection and Affordable Care Act, or Obamacare, OTC drugs were eligible.
What is the Flexible Spending Account Limit?
The FSA contribution limit was also a casualty of the Affordable Care Act. After the law was passed, the limit to the contributions was capped at $2,500 annually.
Can FSA Funds Be Rolled Over To The Following Year?
No, FSA funds are “use-it-or-lose-it.” This means that if you contribute to the FSA but do not use all of the funds in the given plan year, you forfeit that money and can never use it. That is why it is very important to accurately predict how much money you will need for healthcare services.
Do FSA Funds Need to be Accumulated in Order to Be Used?
No, you can use any amount up to your annual contribution to pay for your health care needs even if that amount has not been deposited into your account. If your annual contribution is $2,500 and on January 10 you need to use $2,500 to pay for something, then you can use that full amount. You will still contribute for the rest of the year provided you still work for the same employer? What if you leave the employer? They are on the hook for that lost amount. This is the trade-off for possibly forfeiting funds you do not use by the end of the plan year.
What is a Dependent Care Flexible Spending Account?
A dependent care FSA works in the same way that a healthcare FSA works. However, instead of paying for medical expenses, a dependent care FSA pays for childcare expenses.
Is an FSA Good for a Young Person?
So if you find yourself asking, “What is a flexible spending account, and is it right for me,” the answer will almost undoubtedly be yes. It never hurts to prepare for at least one office visit and prescription drug during the year. Just be sure you accurately predict how much money you will need.