Mature woman at the doctor's office.

FSA: What Is It, And Should I Get One?

8-minute read

When you’re trying to make the best of your health care options, a flexible spending account may appear on your radar as a great option. Whether you’re wading through your new employee benefits package or reassessing your choices at open enrollment, an FSA is one benefit that you need to consider carefully. As a tax advantages account, an FSA can offer you a way to really maximize your money. 

Before you sign up for your FSA, you’ll need to understand exactly what it is and if this account can fit into your financial plans. Let’s dive in to take a closer look at FSAs.

What Is An FSA?

An FSA is also known as a flexible spending account. So, what is a flexible spending account?  Although it is not so flexible that you can spend the funds on whatever your heart desires, you can use these funds to cover out-of-pocket medical expenses.

With health care expenses on the rise, sometimes health insurance isn’t enough to cover your medical costs. Unfortunately, many are forced to take on debt in order to fund their out-of-pocket medical expenses. An FSA may be able to help you avoid that difficult choice. You’ll be able to set aside funds to specifically use for your healthcare costs throughout the year. Even if you are caught off guard by an unexpected medical expense, your FSA may be able to help you make it through the medical emergency without worrying about your finances too much. 

The funds in your tax-protected FSA can be used to pay for FSA-eligible medical expenses for you and your dependents. The expenses you might be able to cover with your FSA include medical, dental, hearing, vision and prescriptions. Plus, you can use your FSA funds to pay for any copays, deductibles, or coinsurance that you might purchase throughout the year.

How Do FSAs Work?

With an FSA, your employer owns the account, and only you and your employer can make financial contributions to it. The pretax funds in your FSA can be put toward qualified medical expenses throughout the plan year.

With an FSA, you will be able to contribute pretax dollars; any contributions you make to your FSA will be deducted from your salary before you pay income taxes. That means that the IRS will not count your FSA contributions as earned income for that calendar year. 

In some cases, your employer may provide funds for your FSA. At other companies, you might be entirely responsible for funding your FSA. 

Once you have funds in your FSA, you are free to spend the funds on eligible expenses. However, the method for accessing your funds will vary based on your specific account. For some, you’ll have a debit card that is directly linked to your FSA. You’ll be able to easily pay for your qualified medical expenses directly from your FSA. 

The other option is that you’ll need to save your receipts to submit to your FSA for reimbursement. Although the second option is more labor intensive, you’ll still be able to fund your out-of-pocket medical costs through this tax-advantaged account.

Important Things To Know About FSAs

An FSA may sound like a great deal. After all, you’ll be able to fund your out-of-pocket medical costs with pretax dollars. That can be a pretty amazing benefit opportunity for some of us. However, there are some things you should know before you decide to open an FSA. 

They Have A “Use It Or Lose It” Policy

If you fund your FSA, you need to make a plan to use it by the end of the calendar year. Otherwise, you could lose all of the money that is leftover in the account. 

If you have leftover money in your FSA, it will be returned to your employer. However, some employers will offer you a grace period of a month or two to use the remaining funds. Other employers may even allow you to carry over some of the funds into the next year. 

Make sure to consult your HR department to understand your employer’s rules surrounding your FSA. If the company has a strict policy forcing you to forfeit all of the funds at the end of the year, then create a plan to use those funds before you lose them. 

If you aren’t sure what to do with leftover funds, then consider some creative options. You could stock up on your contact lens solution, visit a specialist doctor about the minor health concern that you’ve been avoiding, talk to a nutritionist about your diet, or consider buying some extra frames with the cash. You might need to get creative, but it’s critical that you find a way to spend the money. Otherwise, the money will be returned to your employer and you’ll never see it again. 

They Do Not Cover Insurance Premiums

You aren’t able to use your FSA funds to cover your insurance premiums. The goal of an FSA is to fund your additional out-of-pocket expenses, not to cover all of your healthcare costs. Although you will still be responsible for your insurance premiums, an FSA can help you cover other medical expenses. 

They Do Cover A Variety Of Other Healthcare Expenses

If you encounter a healthcare expense during the year, it is very likely that your FSA will be able to cover it. However, not all healthcare costs are FSA-eligible expenses. For example, you cannot use an FSA to fund your gym membership, vitamins, over-the-counter drugs, or any cosmetic procedures. 

You can use your FSA funds to cover a wide range of expenses, including:

  • Dental care
  • Vision care
  • Coinsurance
  • Insulin
  • Acupuncture
  • Copayments
  • Prescription medications
  • Deductibles
  • Some mental health care
  • LASIK
  • Fertility treatments
  • Contact lenses and solution
  • Birth control
  • Pregnancy tests
  • Chiropractors

This is by no means a comprehensive list of every FSA-eligible expense. But it should give you an idea of what’s covered and what isn’t. If you want to determine if a specific expense is covered, then you should consult your HR department.

Other Types Of Employer-Controlled Accounts

While you consider opening an FSA, you should also think about any other employer-offered accounts. It’s important to understand what types of accounts are available to you. Depending on your season of life, some accounts may be more useful to you than others. 

Dependent-Care FSAs

Another type of FSA is a Dependent Care FSA. Don’t confuse this with an FSA. Although the Dependent Care FSA is also a pretax account, it does not fund medical expenses. 

You can use a Dependent Care FSA to fund eligible services that are necessary to support your dependents while you’re at work. For example, you can fund daycare or summer camp for your child through this tax-advantaged account. Or if you have elderly parents to care for, then you could use these funds to provide an adult daycare. 

If you’re preparing for a baby or taking care of aging parents, then a Dependent Care FSA might be a good fit. 

Health Savings Accounts (HSAs)

An HSA, or health savings account, can often be confused with an FSA. Although the names are extremely similar thanks to an alphabet soup of retirement and health care savings accounts, an HSA is very different from an FSA. 

First of all, you can’t open an HSA unless you are enrolled in a high-deductible health insurance plan. If you are not on a high-deductible plan, then Uncle Sam has decided that you are ineligible to use an HSA. If you aren’t sure whether your plan qualifies, then check out the IRS website to find the current limits. 

Unlike an FSA, you can open an HSA without the help of your employer. If you are on a high-deductible health care plan, then you will be able to sign up for an HSA regardless of what your employer offers. 

The final difference is that the money in your HSA will roll over from one year to the next. With that, you won’t have to scramble to spend the funds or risk losing any leftover funds. 

On other levels, an HSA can seem similar to an FSA. You’ll be able to make contributions from your paycheck up to the IRS-determined limit. When you’re ready to spend the funds, you’ll have two choices: use a debit card that is linked to your HSA account, or save and submit your receipts in order to be reimbursed from your HSA. 

The medical expenses that you’re able to cover with your HSA are very similar to those that you can cover with your FSA. Plus, you can spend the funds out of your HSA on noneligible expenses as long as you pay income tax on that withdrawal. 

401(k)s

A 401(k) is another account commonly offered by employers. Although it isn’t meant to cover medical expenses or dependent care, it is worth mentioning as you make decisions about your employer benefits package. A 401(k) is one of the most popular retirement savings accounts and might be vital to your long-term financial success. 

As of 2019, you can contribute up to $19,000 into your 401(k) each year. You’ll be able to contribute to your 401(k) directly from your paycheck. All contributions made to your 401(k) are considered pretax dollars. In some cases, your employer may even match your contributions. If your employer offers a 401(k) match, you should definitely take advantage of that opportunity. 

With many Americans struggling to build their retirement savings, a 401(k) is an account worth considering. If you’re relatively healthy and don’t anticipate any major medical expenses, then a 401(k) might be a better place to stash your savings than an FSA. The money in your 401(k) will be allowed to roll over each year and grow into your retirement nest egg. If you choose to prioritize a 401(k) over an FSA, then make sure to build a solid emergency fund to help cover any unexpected expenses. 

Should I Get An FSA?

If you know you’re going to have medical expenses throughout the year, getting an FSA can be a wise decision. However, if you’re relatively healthy and would only consider getting an FSA as a precaution against unforeseen health issues, there may be more practical healthcare account options to choose from that won’t run the risk of you losing money at the end of your plan year.

If you’re concerned about unforeseen medical expenses, then you could consider an HSA instead. With a high-deductible health care plan, an HSA is a viable option. In this case, you would be able to take advantage of the tax benefits of a health savings account without the potential of losing your savings at the end of the year. 

Another option is to consider building a substantial emergency fund to cover any medical expenses. With this, you’ll be able to handle any unexpected medical expenses without relying on an FSA that won’t allow you to roll over funds from year to year. 

Instead of building up your FSA each year, you could focus your pretax savings efforts on building a 401(k). With a 401(k), you’ll be able to build your savings year after year and work towards a solid retirement nest egg. 

Saving for money can be a challenge, so make sure you consider your health concerns before moving forward with an FSA. If you decide an FSA is a good option, then talk to your HR department to find out more about the details surrounding your employer’s FSA.

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