FSA: FSA stands for Flexible Spending Account.  A Flexible Spending Account is a type of savings account that allows employees to set aside pre-tax dollars to pay for eligible out-of-pocket healthcare expenses. FSAs are typically offered by employers as part of a benefits package. FinStream has produced several videos on the benefits of FSA’s.  Here’s a detailed look at FSAs:

Key Features of FSAs

  1. Pre-Tax Contributions: Money contributed to an FSA is deducted from your paycheck before taxes, reducing your taxable income.
  2. Contribution Limits: There are annual limits to how much you can contribute to an FSA. For 2024, the contribution limit is $3,050 per employee.
  3. Use-It-or-Lose-It Rule: Typically, you must use the funds in your FSA within the plan year. Some plans offer a grace period of up to 2.5 months to use the remaining funds or allow you to carry over up to $610 to the next plan year.
  4. Eligible Expenses: FSA funds can be used for a variety of healthcare expenses, including co-payments, deductibles, prescription medications, medical devices, and some over-the-counter items.

Types of FSAs

  1. Healthcare FSA: Used to pay for eligible medical, dental, and vision expenses not covered by insurance.
  2. Dependent Care FSA: Used to pay for dependent care expenses, such as daycare for children under 13 or care for a disabled dependent.
  3. Limited Purpose FSA: Used in conjunction with a Health Savings Account (HSA) and typically restricted to dental and vision expenses.

Benefits of an FSA

  1. Tax Savings: Contributions to an FSA reduce your taxable income, which can result in significant tax savings.
  2. Immediate Access to Funds: The total amount you elect to contribute for the year is available for use at the beginning of the plan year, even though you make contributions throughout the year.
  3. Convenient Payment Methods: Many FSAs come with a debit card, making it easy to pay for eligible expenses directly from your FSA.

Considerations and Limitations

  1. Forfeiture Risk: The use-it-or-lose-it rule means you need to carefully estimate your healthcare expenses for the year to avoid losing any unused funds.
  2. Non-Transferable: FSAs are linked to your employment. If you change jobs, you typically lose access to the FSA unless you spend the remaining funds before leaving.
  3. Eligibility and Documentation: Not all healthcare expenses are eligible for reimbursement, and you may need to provide documentation or receipts to prove that expenses are eligible.

Example of Using an FSA

Let’s say you elect to contribute $2,500 to your healthcare FSA for the year. Each paycheck, a portion of this amount is deducted pre-tax, reducing your taxable income. Throughout the year, you can use your funds to pay for eligible medical expenses, such as:

  • $200 for a dental check-up and cleaning
  • $150 for prescription eyeglasses
  • $1,000 for a medical procedure co-pay

By using pre-tax dollars for these expenses, you save money that would otherwise go to federal income and payroll taxes.

FSAs can be a valuable tool for managing healthcare costs and reducing taxable income. However, careful planning is necessary to ensure you use the funds effectively and avoid forfeiting any money.

Watch these free videos on Finstream TV to learn more about FSA’s.