Insurance and Finance

Use It Before You Lose It: Benefits of Your FSA

By Peter Simek 11.1.17

Whatever your feelings about healthcare in the U.S., one thing most people agree on is that it can be really complicated. Sometimes it can feel like you need an advanced degree in healthcare management just to sort through the jumble of acronyms: HMOs, PPOs, the ACA, HSAs, and FSAs.

The FSA, which stands for flexible spending account, has grown in popularity over the last decade as many employers add them to cafeteria-style healthcare plans. But its origin goes back to the 1960s, a time when inflation and the rapid rise of health insurance costs led to surging out-of-pocket costs for employees and patients. As deductibles and coinsurance costs rose, the IRS devised the FSA as a way to allow individuals to use pretax dollars to cover medical expenses, and, eventually, dependent (child) care expenses.

You may already have an FSA through your work, managed by your human resources department, but you may not be 100 percent comfortable knowing how to use it to its greatest benefit. 

The Basics

There are three kinds of FSAs: health, dependent care, and adoption. They all work similarly. On the first day of the year, an annual allowance is placed into the FSA account. Throughout the course of the year, a percentage of the employee’s pretax earnings is deducted from their paychecks so that by the end of the year the amount that is deducted is equal to the annual allowance. From January 1, the employee has access to the entire annual allowance.

So if an employee elects to place $1,200 into their FSA, $100 per month will be deducted from their pretax earnings. But the employee will have access to all $1,200 to use on qualifying expenses on January 1 and be able to use their FSA card as a debit card on relevant expenses.

The Benefits

One benefit of paying for expenses in this way is that by spending pretax dollars you end up with a lower bill come tax-filing season. If you are in the 30 percent tax bracket, for example, spending $100 out of your FSA on prescriptions or co-pays saves you the $30 you’d be taxed on that $100 of income that, without an FSA, you’d be spending out of pocket. 

Another benefit is that with access to the full amount of your FSA funds from the beginning of the year, you’ve already set aside a budget for those medical or dependent care expenses. So whether you break your arm in February and incur a large expense or you are simply spending more some months on doctors visits than others, you’re paying an equal amount (1/24th if you get paid every two weeks) of your FSA budget out of your paychecks, instead of suddenly having to come up with money for an expense you haven’t budgeted for.

The Drawbacks

There is one catch (isn’t there always?). Your FSA dollars won’t turn into a pumpkin at midnight, but they might disappear at the end of the year if you haven’t spent them. If you have money in your account, only up to $500 will roll over to the next year. Any amount greater than that may be lost.

However, plans will generally offer a grace period — prior-year FSA dollars can be spent on qualifying expenses for the first two and a half months of the new year. But if you put $2,000 in an FSA and have only spent $200 by December, you may have to figure out how to spend $1,300 in a few months or risk losing your money.

The risk of losing money is one reason why employees and employers may prefer other healthcare tools. There are several others.

  • Making all FSA dollars available to employees up front comes at a cost to employers. 
  • FSAs can incentivize spending on nonessential health-related costs and items at the end of the year.
  • FSAs cannot be used with high-deductible healthcare plans, which come with their own potential savings and costs. Instead, a high-deductible healthcare plans will use a health savings account, which is governed by its own set of IRS tax rules and regulations.
  • Employees can only put $2,600 into their FSA, since the passing of the Affordable Care Act. This limit, however, may rise in the coming years.

The Types

Health FSA

Health-related expenses that qualify for your health FSA are defined by IRS rules and your healthcare provider. Typically, FSA dollars can be used to pay your deductibles, office visit co-pays, prescriptions, and dental and vision expenses, including eyeglasses and contact lenses. Over-the-counter medicines can also be purchased with your FSA, including Band-Aids, first aid items, thermometers, and diabetic supplies and tests. In other words, if you find yourself nearing the end of the year and you still have a healthy FSA balance, this is the time to go in for checkups and stock up on medicine-cabinet supplies.

Dependent Care FSA

Paying dependent care expenses through an FSA can save 18 to 50 percent combined on federal, state, and local taxes. According to the IRS, dependent care FSAs can cover costs of day care, after-school care, babysitters, and even preschool tuition. After kindergarten, dependent care FSA dollars cannot be used for school tuition. And be careful: FSA rules do not allow for double dipping, so if you use those dollars to cover child care expense, make sure you’re not accidentally deducting those same child care expenses from your taxes.

Adoption FSA

Some employer FSA programs allow for adoption costs to be paid with pretax dollars through an FSA account. Qualifying expenses often include adoption fees, court costs, attorney fees, and travel costs.

The Bottom Line

FSA accounts can be easy to use and extremely useful in saving on healthcare and childcare, two vital areas of your life that can be difficult to budget for. It just takes a little planning to maximize your benefits. You’ll want to take a look at your average healthcare expenses — what do you know is coming up? How much do you feel comfortable cushioning your account with for emergencies or unexpected illnesses? Often, your human resources department can help you work through this.

Another important consideration is your health insurance policy; are you getting the best coverage for your needs? Health insurance is the first step to a healthy family. Talk to your Texas Farm Bureau Insurance Agent about a Blue Cross Blue Shield plan.

Coverage and discounts are subject to qualifications and policy terms and may vary by situation. 

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