Flexible Spending Account (FSA) also recognized as flexible spending arrangement is one of the obtainable options to avail tax benefit and allows you to spend this pre-tax money for paying eligible health care expenses or eligible non-medical expenses, even purchase of certain qualified medical equipment like diagnostic devices, bandages, crutches. FSA is being set up by the employer for the employees and the contributed money can be used for you, your spouse or any of your declared dependent. Only you or/and your employer can contribute to the FSA assigned to you.
A planned and legitimate contribution to Flexible Spending Account can significantly reduce your overall tax liability for a year, but if you found that you will not be able to spend the accumulated amount in FSA for a particular year it may not be a wise decision to avail FSA, also an FSA is employer owned and before availing Flexible Spending Account you should assess well that the employer is giving the desired options you need. So, it’s indeed a lucrative opportunity to pay less taxes and save more money.
Types of Flexible Spending Account
We can broadly categorize FSA into three types:
- Flexible Spending Account Health Care: You can use Health Care FSA (HCFSA) as a tax benefit account to facilitate for a wide range of eligible medical, dental, vision care, hearing expenses (which are not covered by other insurance) including purchase of prescribed drugs. The most important thing is you can pay for the expense before you have contributed the full amount in your account.
- Flexible Spending Account Dependent Care: This tax saving account is used to manage your expenditure for taking care of your dependents, you can use it for paying your child’s preschool, summer day camp, before or after school programs and even the day care for your child or elder relatives. Your contribution to Flexible Spending Account is tax free and thus reducing your overall taxable income. You can only avail dependent care FSA benefits for your child if his/her age is less than thirteen years. However, if you have a dependent child who is mentally or physically challenged and thus not able to take care of themselves you can avail dependent care FSA even the child’s age is more than thirteen years.
- Limited Purpose Flexible Spending Account: IRS allows the use of Limited purpose FSA even if you have an HSA, but as the name suggested disbursement from this account is limited to qualified vision and dental care only. The most important benefit having a limited purpose FSA is you can avail your medical expenses from this account while leaving the Health Savings Account to grow and build a corpus amount for your future needs.
Flexible Spending Account Contribution Limits & Key Features
When FSA is being set up for you by your employer, depending on your employer they may offer you two options so that you can carry forward the left over amount up to a certain limit for the next year expenses. However, the employee can obtain only one option and not both.
The first option is to carry forward a sum of maximum $550 to the next year from your left-over money in the FSA.
Or else you can extend your eligibility up to extra 2.5 months from the date of expiry.
Depending on your benefit plan, your employer may also contribute to your FSA, but contribution to your FSA by the employer is not mandatory. From an employer perspective also, it is beneficial to offer FSA to the employees as it reduces the business’s payroll taxes.
The maximum limit of contribution in this bucket (FSA) is limited to $2,850 per year as of year 2022, however your employer may stipulate a lower contribution limit for you. You should plan carefully before contributing to FSA because according to Internal Revenue Service (IRS) rule you cannot modify your elected option for a year unless your employment status changes or any other qualified event happens.
Using an FSA is easy. You can access the money in your health care and dependent day care through a debit card to immediately pay for services and for fixed hours purchases. Even if you are not comfortable using debit cards you can use fax or mobile apps. But no matter how you make payments it is always necessary to keep your receipts.
Reimbursement Process For Flexible Spending Account
You will be covered under FSA plan from the first day of obtaining the plan and you can also get reimbursement of your contributed amount from the day one itself. Depending on your employer you may get two options to avail the money from FSA:
- You may be provided an FSA debit card, you can use the card for FSA eligible expenses. You need to check with your employer if you need to submit the receipt for these expenses or not. You cannot pay using this card if the purchased item or service is not FSA eligible as per your plan.
- You must submit a reimbursement claim form to your employer with all the proof of your qualified expenses and you will get the reimbursement amount once verified.
Although you need to submit the claim for reimbursement within the end of the financial year, your employer may also provide you a run-out period, that is some extra time to submit your claim incurred during the year.
Drawbacks of Flexible Spending Account
- FSA is a “use or lose” kind of account, unused amount from the account will be expired within a certain period.
- Depending on your eligibility you may able to contribute on different FSAs, but you are not allowed to transfer funds between them.
- With your unemployment or if you change your job, your eligibility for FSA will be lost with immediate effect and the left-over amount in your FSA will be expired automatically. Any expense made during this time cannot be reimbursed through FSA.
- You cannot use FSA accumulated amount for paying insurance premiums.
- You cannot avail FSA if you are self-employed, because FSA can only be created and owned by the employer for eligible employees, if you are self-employed you can look for a Medical Savings Account (MSA).