What is a Flexible Spending Account (FSA)?
Definition and Purpose: A Flexible Spending Account (FSA) is a special account used in the United States that allows an individual to set aside pre-tax earnings to pay for qualified medical expenses. The primary purpose of an FSA is to provide a tax-advantaged way to pay for out-of-pocket healthcare costs.
Types of FSAs:
- Healthcare FSA: For eligible medical, dental, and vision expenses not covered by insurance.
- Dependent Care FSA: Specifically for costs related to the care of dependents, like daycare for children under 13, or care for a disabled spouse or dependent.
Dependent Care FSA
Specifics and Eligibility: A Dependent Care FSA is designed to assist with the expenses of caring for dependents. It is particularly beneficial for working individuals who have to pay for childcare or adult dependent care.
- Childcare for children under 13
- Adult daycare for elderly or disabled dependents
- Preschool tuition
- Before and after school care programs
Comparison of Healthcare FSA and Dependent Care FSA
|Dependent Care FSA
|Medical, dental, vision
|Childcare, adult dependent care
|Yes, limited amount
|Children under 13, disabled dependents
FSAs, both healthcare and dependent care types, offer significant tax savings on eligible expenses. While healthcare FSAs cover a range of medical costs, dependent care FSAs focus on childcare and eldercare expenses, helping working individuals manage these costs more effectively.
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Frequently Asked Questions
Is it reasonable to have an FSA and an HSA?
You can use a combination of HSA and limited FSA or a combination of FSA. This will allow you to use your FSA for dental, vision, and preventive care expenses, while your HSA funds can grow through contributions and investments.
What happens to my FSA when I quit?
If you leave or lose your job, any remaining money in your FSA will go to your employer unless you qualify for and opt into COBRA continuation coverage for your FSA.
What is the most significant disadvantage of FSA?
The contribution limit for FSA is lower than that of HSA. You cannot keep the remaining funds if you do not use the contributed amount to pay for eligible health expenses during the year. Unlike HSA, there is no option to invest FSA contributions in stocks to increase their value.
Does an FSA reduce your taxable income?
Contributing to an FSA lowers your taxable income since the funds come from pre-tax dollars. But remember that expenses paid through an FSA cannot be used for tax deductions.
Can I withdraw money from my HSA?
To receive cash from your HSA, you can submit a withdrawal request form. However, if you use cash to pay for items that are not eligible, you must report it when you file your taxes. This cash will be subject to income tax and treated as if it was never in your tax-free HSA.