With the average American household spending $5,000 per person in healthcare expenses each year, it’s no surprise that Flexible Spending Accounts (FSAs) are so popular. According to the Bureau of Labor Statistics, in 2021, 43% of employees who worked for private companies had access to an FSA. These accounts can save you a lot in healthcare costs. To learn more, check out the following FSA FAQs.
What is a Healthcare Flexible Spending Account or Healthcare FSA?
A healthcare Flexible Spending Account (FSA) is an employer-sponsored, tax-advantaged benefit account for employees. Through an FSA, you can withhold pre-tax dollars from your paycheck to cover out-of-pocket healthcare expenses. You can use the money for yourself and your qualified dependents.
What are the benefits of having an FSA?
The primary benefit of an FSA is tax savings. You contribute to the account on a pre-tax basis, meaning you pay no Federal, FICA, or State taxes on the set aside funds. Then you can use the money to pay for medical expenses for yourself and your family members.
What are “qualified” expenses?
You can use a healthcare FSA to pay for medical, dental or vision expenses that you would normally pay for out-of-pocket. Common FSA-eligible expenses include:
- Deductibles, coinsurance, or co-payment amounts for your health plan
- Corrective eyewear, such as glasses and contact lenses
- Dental work and orthodontia
- Prescription medications
There are also many over-the-counter (OTC) items are eligible for reimbursement from an FSA. Here’s an overview:
- Eligible items – Insulin and healthcare products that do not contain any medicine or drugs. This includes non-medicated bandages, contact lens solution, hearing aid batteries, diagnostic and testing products, reading glasses, etc. These products do not require a prescription, letter of medical necessity or doctor’s directive to be FSA-eligible.
- Eligible with a Prescription – OTC items that contain a drug or medication. Examples of items that require a prescription include diaper rash creams and ointments, cold and allergy medicines, laxatives, pain relievers, sleep aids, etc.
- Eligible with Letter of Medical Necessity (LMN) or a Doctor’s Directive – Items that require a letter of medical necessity or doctor’s directive are those that can be used for a specific medical condition or for general health purposes. These include products and services such as massage therapy, athletic shoes, fiber and weight loss supplements, vitamins, air purifiers, sitz baths, and support hose, among others.
For a list of eligible expenses, see IRS Publication 502.
Who are qualified dependents?
Your qualified dependents are typically your spouse or child. They also include anyone you claim as an exemption on your federal income tax.
When can I sign up for an FSA?
You can sign up for an FSA during the open enrollment season. If you are a new hire, you may be able to sign up for an FSA within 60 days of your hire date.
If you have a qualifying event, such as a new baby or adoption, you may be able to enroll then. Contact your HR department for plan details.
How much can I contribute to my healthcare FSA?
For 2023, the IRS annual contribution limit is $3,050.
How do I fund my FSA?
During enrollment season, you choose how much you want to contribute to your FSA (up to the annual limit). Your annual election amount will be divided by how many pay periods are in the year. Each payday, your contributions will be deducted pre-tax from your paycheck in equal amounts.
Employers may also contribute to employee FSAs. If that happens, the combined contributions (yours plus the employers) cannot go over the annual limit.
Can I change my FSA amount mid-year?
In most cases, no. However, if you have a qualified life event, you may be able make a change. Qualified events include:
- Change in your employment status
- New child/adoption
Talk to your HR or benefits administrator for clarification.
How can I access my funds?
Most FSA plans offer an account-linked benefits debit card. You can use the debit card when you make a purchase for an eligible expense at a pharmacy, a doctor’s office, online, or another location.
If you do not have or cannot use your debit card, you can pay out-of-pocket, then submit a claim for reimbursement to your plan’s administrator. Be sure to keep itemized receipts and other related documents for your claim. Non-itemized cash register receipts, credit card receipts, and cancelled checks cannot be used to validate a claim.
What happens if I use my FSA for a non-eligible expense?
If you submit a claim for reimbursement of a non-eligible expense, your administrator should deny the claim.
If you used your benefits debit card and the expense is deemed ineligible after the transaction, you must reimburse your FSA account for that amount. You may be required to pay income taxes if you do not reimburse the account.
What happens if I don’t use all the money in my account?
Depending on your employer’s plan setup, there are three options:
- Forfeiture (also known as ‘use it or lose it’) – If you don’t use all the funds by the end of the plan year, then you lose the remaining balance.
- Carryover – You can carry over up to $610 (in 2023) in unused funds to the next plan year. The maximum amount is determined by your employer.
- Grace period – You have 2.5 months in the new plan year to spend any leftover FSA money from the previous year.
Contact HR or your plan administrator to find out which option is in your plan.
Does Carryover count against next year’s annual limit?
No. If you are able to carry over $610, it does not count toward the annual contribution amount for the next year.
Can both my spouse and I have an FSA at the same time?
Yes. The annual contribution limit is per person. Therefore, you could each contribute the maximum amount to separate FSAs through your respective employers.
Do I have to be enrolled in a healthcare plan to elect an FSA?
No. Unlike a Health Savings Account (HSA), there is no health plan requirement to enroll in an FSA.
Other FSA FAQs
What’s the difference between a healthcare FSA and Dependent Care FSA?
A healthcare FSA is used for healthcare-related items and expenses (see above).
A Dependent Care FSA, also known as a Dependent Care Assistance Plan (DCAP), is used for out-of-pocket expenses related to child or other dependent care.
With a DCAP, you can pay for child/dependent care services that allow you to be able to go to work or school. Typical expenses include day care, nursery school, before and after school care, summer day camps, and daytime elder care for legal tax dependents. The annual contribution limit for DCAP is $5,000.
For a Dependent Care FSA, the dependent must meet one of the following criteria:
- Under age 13 and for whom you would be entitled to a deduction under IRS Code 151(c); or
- The dependent is physically or mentally unable to care for him/herself; or,
- Your spouse who is physically or mentally unable to care for him/herself
Can I transfer money from my Dependent Care FSA to my healthcare FSA (or vice versa)?
No. You cannot transfer money between accounts. The same applies to HSAs and DCAPs.
What is a Limited Purpose FSA?
A limited purpose FSA (LPFSA) is available for people who have an HSA. An LPFSA can only be used for qualified dental and vision expenses.
Keep in mind, you cannot “double dip” with an LPFSA. That means you cannot get reimbursement from your HSA and your LPFSA for the same expense.