What is an FSA and how does it work?

What is an FSA?

An FSA or Flexible Spending Account allows employees to set aside pre-tax dollars to spend on eligible medical, dental, and vision expenses for themselves and their dependents. FSAs are generally use-it-or-lose-it so it’s important to be thoughtful when determining how much to put aside. Employees cannot enroll in this program if they are contributing to or receiving contributions in an HSA. 

There are various flavors of FSAs. In addition to a healthcare FSA, there are:

• A Limited Purpose FSA (LPFSA): A type of flexible spending account that allows employees to set aside pre-tax dollars for dental and vision expenses for employees and their dependents. This limited FSA is compatible with enrollment in an HDHP with HSA. 
• A Dependent Care FSA (DCFSA): A type of flexible spending account that allows employees to set aside pre-tax dollars for dependent care expenses, such as daycare, preschool, and adult daycare. Like traditional FSAs, DCFSAs are generally use-it-or-lose-it so it’s important to be thoughtful when determining how much to put aside.

How does a Healthcare FSA work

Employees can make pre-tax contributions from their paychecks, which allows them to pay for the healthcare services they need while also reducing taxable income. Healthcare FSAs don’t work as long-term savings vehicles. Funds don’t roll over or follow employees when they leave the company. Generally, the money in an FSA follows a use it or lose it rule with unspent funds forfeited at the end of the year.

Some FSAs have provisions known as a grace period or carryover amount that allow for additional time to spend funds or carry over a portion of their prior year's balance into the new plan year. Since these provisions vary, make sure to check in with your vendor regarding what type of provision is included in your plan.

Healthcare FSA funds can be used to pay for expenses such as medical, dental, and vision deductibles, coinsurance, and copays for employees and their covered dependents. FSAs are governed by IRS regulations with a  maximum contribution for 2023 of $3,050. 

It’s important to note that those enrolled in a healthcare FSA  cannot contribute or receive contributions in an HSA because the FSA is considered disqualifying coverage in the HSA. The stipulation applies to spouses as well. 

What are eligible Flexible Spending Account expenses?

If you have a Flexible Spending Account (FSA), it's important to know what expenses are eligible for reimbursement. An FSA is an employer-sponsored benefit that allows you to set aside a portion of your pre-tax income to pay for certain out-of-pocket expenses. These expenses can include health care and dependent care costs.

Here are some of the eligible expenses for health care that you can use your FSA to pay for:

Medical services

Your FSA can be used to pay for medical services such as doctor's visits, hospital stays, and surgeries. This also includes mental health services and substance abuse treatment.

Prescription medications

Prescription medications are also eligible expenses for FSA reimbursement. You can use your FSA funds to pay for copays, deductibles, and coinsurance for your prescription drugs.

Over-the-counter medications

Over-the-counter (OTC) medications, such as pain relievers, allergy medication, and cough syrup, are eligible expenses as long as they are prescribed by a doctor.

Medical devices and equipment

Medical devices and equipment, such as crutches, wheelchairs, and hearing aids, are also eligible expenses for FSA reimbursement.

Vision care expenses

Your FSA can be used to pay for vision care expenses such as eye exams, prescription glasses or contact lenses, and corrective eye surgery.

Ineligible FSA expenses for health care

There are some expenses that are not eligible for FSA reimbursement. These include:

Cosmetic procedures

Cosmetic procedures, such as plastic surgery or teeth whitening, are not eligible expenses for FSA reimbursement.

Non-prescription drugs

Non-prescription drugs, such as pain relievers, allergy medication, and cough syrup, are not eligible expenses unless they are prescribed by a doctor.

Health club memberships

Health club memberships, gym equipment, and exercise classes are not eligible expenses for FSA reimbursement.

Vitamins and supplements

Vitamins and supplements are not eligible expenses for FSA reimbursement unless they are prescribed by a doctor.

There are several advantages to enrolling in an FSA:

1. Tax savings

One of the biggest advantages of an FSA is the tax savings. Because the money you contribute to your FSA is deducted from your paycheck before taxes, you'll pay less in federal income tax, Social Security tax, and Medicare tax.

2. Cost savings

Yes - more savings. By using pre-tax dollars to pay for eligible healthcare expenses, you can save money on out-of-pocket costs such as deductibles, copays, and coinsurance.

3. Budgeting

Make informed decisions when spending. Enrolling in an FSA can help you budget for healthcare expenses. By setting aside a specific amount of money each year, you can avoid unexpected expenses and plan for your healthcare costs in advance.

4. Convenience

Using an FSA is convenient because you can pay for eligible healthcare expenses using a debit card linked to your account. You can also submit receipts for reimbursement if you prefer.

6 reasons to consider enrolling in an FSA

Enrolling in a flexible spending account (FSA) can be a smart financial decision for many individuals and families. 

1. Saving money on taxes: When you contribute to an FSA, you use pre-tax dollars to pay for eligible expenses. This can lower your taxable income and reduce the amount of income tax you owe.
2. Reducing healthcare costs: FSAs can help you save money on out-of-pocket healthcare expenses, such as deductibles, copays, and coinsurance. This can be especially helpful if you have a chronic health condition or need expensive medical treatments.
3. Increasing take-home pay: Since FSA contributions are deducted from your paycheck before taxes, you may see an increase in your take-home pay. This can help you budget for other expenses or save for the future.
4. Easy to use: Many FSAs come with a debit card that can be used to pay for eligible expenses directly at the point of service. This can simplify the process of tracking and submitting expenses for reimbursement.
5. Rollover option: Some FSAs offer a rollover option, which allows you to carry over unused funds from one year to the next. This can be a helpful feature if you have predictable healthcare expenses that you want to budget for.
6. Flexible spending options: Depending on your employer's plan, you may have the option to enroll in a healthcare FSA, dependent care FSA, or both. This can give you more flexibility in how you allocate your pre-tax dollars to cover eligible expenses.
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Overall, enrolling in a flexible spending account can be a smart financial move that can help you save money on taxes and healthcare expenses. However, it's important to carefully review your employer's plan details and eligibility requirements before enrolling to ensure it's the right choice for you.

We can help. <span class="text-style-link text-color-blue" fs-mirrorclick-element="trigger" role="button">Schedule a consultation</span> with Forma to set up your Flexible Spending Account.