A flexible spending account is another tax-advantaged savings account. It’s one of the better options most employees have to save for out-of-pocket healthcare expenses.
Of course, before you decide to enroll with your employer, you may be wondering:
In this article, we will break these questions down and touch on some other options you can defer to if you’re worried about saving for medical expenses.
A flexible spending account (FSA) is a type of savings account with some significant tax advantages. However, they also carry some special rules.
The flexible spending account is named in reference to the arrangement between employer and employee. If your employer offers an FSA, you can contribute a portion of your normal earnings to it.
Then, your employer may also contribute to your account. Distributions from the FSA are used to reimburse you in the event you need qualified medical or dental services.
Essentially, an FSA is a piggy bank that you contribute to and then pull from when/if you have certain out-of-pocket healthcare expenses.
The advantages of a flexible spending account are:
A dependent-care flexible spending account is another type of FSA.
It is used to pay for childcare expenses for your children until age 13. Of course, it can also be used for the care of adult dependents. Adult dependents must meet the IRS guidelines, and essentially are adults who are incapable of caring for themselves.
There are only two types of FSA, as we’ve covered. Both are offered through employers, and enrolment can be completed during the enrolment period (more information under “Can anyone open an FSA?”.)
You have something of a tax-advantaged alternative to a simple emergency savings account.
FSA funds are used to reimburse payments for medical care. Qualifying payments are well-defined, and include:
Notably, this also includes reimbursements for non-prescription insulin.
In addition, all of the above can be covered for your spouse and dependents.
These include items such as bandages, crutches, and diagnostic medical devices. Importantly, prescription drug costs, which aren’t covered by all Medicare plans, are covered by your FSA. The CARES Act permanently expanded coverage to:
Deductibles and copayments are also coverable by your FSA.
Like similarly tax-advantaged accounts, your flexible spending account has limits.
The 2022 contribution limit is $2,850, a $100 increase from 2021. However, the dependent care FSA limit did not change from 2021.
While most important medical expenses are covered, you cannot use FSA funds for all medical expenses. Cosmetic expenses including surgeries are not included. Other expenses that may lead to better health, such as gym memberships, are also not included.
While deductibles and copayments are also coverable by your FSA, your insurance premiums are not.
Not quite, but most people can.
Most full-time employees meet the eligibility requirements for participation in an FSA. If your employer offers health insurance, you almost certainly qualify. You don’t even need to enroll in a health insurance plan to qualify for an FSA.
If you already have an HSA, you should not enroll for a Healthcare FSA. You can still enroll for a dependent care FSA.
The general rule for employee eligibility is:
Some types of employees are simply not eligible for an FSA. They include:
Self-employed employees or shareholders who own more than 2% in any of the following entities:
Employees with HSAs trying to enroll in a regular dependent care FSA
If you have an HSA, you can still enroll in a Child & Elderly Care FSA.
Business owners are generally ineligible for the tax benefits of an FSA.
The above 2% threshold is explicitly stated by the IRS. Unless you own less than 2% of “your” business, you certainly do not qualify to enroll in an FSA.
For many employees, especially those with health conditions or dependents, yes.
An FSA is a good, tax-advantaged backup fund that is very useful when you’re suddenly faced with out-of-pocket medical and dental expenses.
If you are an employee eligible to enroll in an FSA, it’s normally best to do so. However, there may be special considerations that make it the wrong choice for you.
One great aspect of FSAs is the “F”, flexibility! When you have an FSA, you aren’t under any obligation to contribute a specific amount. The only limitation is the annual contribution limit. So, you can always find a middle ground that makes having an FSA worth it:
Overall, it’s best to use a flexible spending account in the way that suits you. Contribute what you expect you may need.
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