Saving money on a tax return is an especially appealing thought. Fortunately, a Flexible Spending Account (a.k.a., FSA, Flexible Spending Arrangement) can help the prospect become reality.
FSAs are not right for everyone, and not all employers offer the plan. However, when it is available, it does make sense for some individuals. Let’s look at a few important features.
If you subscribe to a healthcare insurance plan through your employer and still expect to pay out-of-pocket medical expenses, a Flexible Savings Account could be for you. Deductibles and co-pays seem to be incrementally increasing, and this type of account helps soften the blow.
How do you save money?
An FSA is structured as a pre-tax payroll deduction. The maximum amount an individual can contribute each year is $2,500. Hypothetically, that means if you make $40,000 per year and put $2,500 in a Flexible Spending Account, your taxable income not counting other deductions would drop to $37,500. Yet, if you tend to incur $1500 per year and not $2,500 in out-of-pocket medical expenses, then you would want to allot a lesser amount to the account, as you could lose the money you do not use.
It is important to mention that Health FSAs recently experienced a regulation change and now allow for $500 to be carried over. If an employer chooses to incorporate the carryover rule, up to 500 unspent dollars can be deferred to the following year. An employer may instead choose to offer a grace period, which typically permits up to 2 ½ additional months to spend the funds on qualified medical costs.
Nevertheless, employers can only allow one or the other: the carryover rule or grace period. Furthermore, they are not obligated to offer either one. Subsequently, it is important to know the particulars regarding your company’s Health Flexible Spending Account before signing up. The sign-up period varies with respective employers and might be just a week or two. In point of fact, a number of companies open the enrollment window at some point in the fall. The exception to the Enrollment Period rule involves a change in family status (e.g., marriage, divorce, birth, adoption). Your benefits manager should be qualified to answer FSA questions.
So, which types of healthcare expenses are commonly covered? Here is a partial list.
- Dental Work
- Prescription Medication
- Insurance deductibles
- Co-pays
- Eyeglasses/Contact Lenses
- Hearing Aid
- Laboratory Charges
- Hospital Services
- Dentures
- Wheel Chair
- Mobility Devices (e.g., Walker)
- Braces
Flexible Spending Accounts can be a blessing for people who have health insurance but still spend money on healthcare. They are not to be confused with Health Savings Accounts: Health Savings Accounts are designed for people who have high-deductible health plans.
For more information on FSAs, go to http://www.treasury.gov/press-center/press-releases/Documents/103113FSA%20Fact%20Sheet.pdf
