As a working professional, managing your finances is essential, and healthcare is one of the most significant expenses you can incur. Flexible Spending Accounts (FSAs) can help you save on healthcare costs while ensuring you don’t leave any money on the table. This guide will explain an FSA, how it works, and why you should consider using one.
What is a Flexible Spending Account?
A Flexible Spending Account (FSA) provides a significant tax advantage–an incredible incentive for your financial future. Employers offer these special accounts to assist employees in their healthcare spending, allowing them to set aside pre-tax income for qualified medical expenses.
How Does an FSA Work?
When you enroll in an FSA, you decide how much money you want to contribute to the account each year, up to a maximum set by the IRS. Your employer will deduct this amount from your paycheck on a pre-tax basis, meaning that the money is taken out before taxes are applied.
What Expenses are Covered by an FSA?
FSAs cover many healthcare expenses, including co-pays, deductibles, prescriptions, and other out-of-pocket expenses. However, some expenses, such as cosmetic procedures and over-the-counter medications, may not be covered. You must check with your employer or FSA provider to see which expenses are eligible for reimbursement.
Benefits of Using an FSA
Using an FSA can provide numerous benefits regarding cost savings and convenience.
Tax Savings
One of the most significant benefits of an FSA is the tax savings it provides. By contributing to an FSA on a pre-tax basis, you reduce your taxable income, which can lower your overall tax bill.
Cost Savings
FSAs can also help you save on healthcare costs by allowing you to pay for qualified expenses with pre-tax dollars. This means that you can effectively reduce the amount you spend on healthcare by up to 30%, depending on your tax bracket.
Convenience
Using an FSA can also be more convenient than other payment methods. For example, instead of paying out-of-pocket and waiting for reimbursement, you can pay for eligible expenses directly from your FSA account using a debit card or submitting a reimbursement claim.
Things to Consider Before Enrolling in an FSA
While FSAs can provide significant benefits, there are also some things to consider before enrolling.
Use-It-or-Lose-It Rule
One important thing to keep in mind is the “use-it-or-lose-it” rule. Any money you contribute to your FSA must be used by the plan year’s end, or you will forfeit it. Some plans may offer a grace period or allow you to carry over a certain amount, but it’s essential to understand the rules of your specific plan.
Eligible Expenses
It’s also important to understand which expenses are eligible for reimbursement under your FSA plan. For example, some expenses, such as over-the-counter medications, may require a prescription to be eligible, and other expenses, such as cosmetic procedures, may not be covered.
Contribution Limits
Finally, it’s essential to know your FSA’s contribution limits. The IRS sets an annual maximum contribution limit, and your employer may also set a maximum limit for your specific plan. It’s important to understand these limits and plan your contributions accordingly.
How Does A FSA Help Pay For Daycare?
Expecting Parents, PAY ATTENTION!
A flexible Spending Account (FSA) can help pay for daycare expenses, but only if your employer offers a Dependent Care FSA. This separate FSA allows you to set aside pre-tax dollars to pay for eligible dependent care expenses, including daycare for children under the age of 13 or for disabled dependents who require care.
The rules for a Dependent Care FSA are similar to those for a regular FSA. First, you decide how much money to contribute each year, up to a maximum set by the IRS. Then, your employer deducts this amount from your paycheck on a pre-tax basis, and you can use the funds to pay for eligible dependent care expenses throughout the year.
It’s important to note that not all daycare expenses are eligible for reimbursement under a Dependent Care FSA. Only expenses necessary to allow you and your spouse (if applicable) to work, look for work, or attend school full-time are eligible. Expenses related to education, overnight camps, and other non-essential activities are not eligible.
In addition, the IRS sets an annual contribution limit for Dependent Care FSAs, which is currently $5,000 per household or $2,500 for married individuals filing separately. If you and your spouse have access to a Dependent Care FSA through your employers, you can each contribute up to the annual limit.
In summary, a Dependent Care FSA can help working parents save money on daycare expenses by allowing them to set aside pre-tax dollars to pay for eligible expenses. If your employer offers this type of FSA, review the rules and limitations to determine if it’s a good option for your family.
Next Steps
Flexible Spending Accounts can be an excellent way to save on healthcare expenses while reducing taxable income. By contributing to an FSA, you can set aside pre-tax dollars to pay for qualified medical expenses, potentially reducing your overall healthcare costs by up to 30%. However, it’s essential to consider the rules and limitations of your specific plan, including the use-it-or-lose-it rule, eligible expenses, and contribution limits. By understanding these factors and planning accordingly, you can maximize your FSA and save money on your healthcare expenses.
Request A Quote
Get help from a licensed financial professional. This service is free of charge.
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.