Did you know that Flexible Spending Accounts (FSAs) aren’t just for healthcare expenses? In fact, there are three common variations to the FSA. Each has its own purpose, but they’re all employer-sponsored benefit accounts designed to help people save on their taxes while setting aside money for necessary expenses. Let’s take a look at Health FSAs, Limited Purpose FSAs, and Dependent Care FSAs.
Most people are familiar with a health FSA, also known as a general purpose FSA. With a health FSA, you can use the set aside funds for hundreds of eligible expenses for yourself and your dependents (usually your spouse and children).
Before the plan year begins, you elect how much money you want to contribute (up to $2,850 in 2022). Then your total is divided up into equal amounts and deducted from each paycheck throughout the year.
When you or your family has an eligible expense, you use these dollars to help cover the cost. Common eligible expenses include:
Most FSA plans come with a benefits debit card that allows you pay for these products and services without having to file a claim. However, you can also file a manual claim with your benefits administrator.
It’s always a good idea to keep your receipts, EOBs, prescription paperwork, letter(s) of medical necessity, and other related documentation because you may need them to file a claim. You may also need these items if the IRS performs an audit.
One thing to keep in mind is the “uniform coverage rule,” which allows you to use your full annual FSA contribution on the first day of the plan year. You do not have to wait for that money to build up before it’s available. Once your available balance reaches zero, any remaining deductions will still come out of your paycheck until the end of the plan year.
You and your spouse can both have a health FSA, and the contribution limits are the same. There is no single versus family coverage with a health FSA.
Depending on your employer’s plan, an FSA will have one of the following three spending options:
A Limited Purpose FSA (LPFSA) shares many similarities with a general purpose Health FSA but has more restrictions. An LPFSA is available only for people enrolled in both a high deductible health plan (HDHP) and an HSA. By law, you cannot have a general purpose Health FSA and HSA at the same time.
Like a health FSA, the contribution limits are the same and the uniform coverage rule applies. However, you can only use an LPFSA for qualified dental and vision expenses, such as exams, prescription eye wear, crowns, fillings, etc.
It’s important to remember that double-dipping is not allowed. You cannot claim the same expense twice – once from your HSA and also from your LPFSA (or the other way around).
Use it or lose it, grace period, and rollover apply to your LPFSA. Check your plan documents to see which spending option your plan has.
A dependent care FSA is one of the most popular benefit accounts, but unlike a health or limited purpose FSA, it is not used for healthcare expenses. Dependent Care FSA, or Dependent Care Assistance Plan (DCAP), is used only to pay for care for qualified dependents while you’re at work or school.
With a DCAP, you can contribute up to $5,000 for employees filing married, or $2,500 for those filing single or separate.
Unlike a health FSA or LPFSA, the uniform coverage rule does not apply to a dependent care FSA. You can only use your accrued balance at the time to cover your expenses.
You can use your DCAP to pay for:
Dependent care FSAs do not offer rollover or grace period. If you do not use all of your pre-tax benefit dollars by the end of the plan year you will lose them.
Health FSA, Limited Purpose FSA, and Dependent Care FSA are the three big FSA types. Some companies may also offer a flexible spending account for adoption assistance or health premiums. Contact your HR department to get a copy of your Summary Plan Description, and find out more about which tax-advantaged benefit accounts your company may offer.