FSAs for Healthcare and Dependent Care

Did you know there are three types of employer-sponsored Flexible Spending Accounts (FSAs)? Each has its purpose, but all three allow users to pay no tax on funds set aside for necessary expenses. The three types are the general purpose healthcare FSA (HFSA), the limited purpose healthcare FSA (LPFSA), and the dependent care FSA (DCFSA).

Healthcare FSA

Most people are familiar with the health FSA. Funds in these accounts can be used for hundreds of eligible healthcare expenses for yourself and your tax dependents.

How It works

Before the plan year begins, you elect how much money you want to set aside in the account, up to an IRS-mandated annual maximum ($3,200 for 2024). That total is deducted from each paycheck in equal amounts throughout the year.

When you or a tax dependent incurs an eligible expense, you use the account to cover the cost. Common qualified expenses include:

• Co-pays, co-insurance, and deductibles
• Emergency room visits
• Prescriptions
• Dental exams and treatments
• Eye exams and treatments
• First aid supplies
• Over-the-counter medicines

Funds Access: Debit Card or Reimbursement

Many healthcare FSA plans come with a debit card that allows you to pay directly for eligible products and services without filing a claim and waiting for reimbursement. However, you can also file a manual claim with your benefits administrator for reimbursement after the purchase.

It’s always a good idea to keep your receipts, insurance Explanations of Benefits (EOBs), prescription paperwork, letter(s) of medical necessity, and other related documentation. You may need them to prove an expense was eligible or to document your expenses for an IRS audit.

Uniform Coverage Rule

Healthcare FSAs include the Uniform Coverage Rule, which lets you access your total annual contribution starting on the first day of the plan year. In other words, you do not have to wait for funds to accumulate in your account before using them for eligible expenses. However, if you spend all of your annual amount before the plan year’s end, paycheck deductions will continue until the plan year has ended.

Married couples can each have a health FSA, with the same annual contribution limit for each. There is no single versus family coverage differential.

Unused Balance

Depending on your employer’s plan, your healthcare FSA will have one of the following three options for addressing the unspent balance at the end of the plan year:

• Use it or lose it – Unspent funds at the end of the plan year are forfeited to the employer
• Grace period – You have up to 2.5 months after the plan year ends to spend any leftover funds
• Carryover – You can carry over up to a certain amount to the following year; for 2024, the Carryover limit is up to $640, depending on your plan setup

Limited Purpose FSA

A Limited Purpose FSA (LPFSA) is similar to a general-purpose healthcare FSA but can only be used for dental and vision expenses. An LPFSA is available only for people who are also enrolled in a Health Savings Account (HSA) simultaneously. (Those enrolled in an HSA are not eligible to have a general-purpose FSA simultaneously.)

Contribution Limits and Eligible Expenses

Limited-purpose FSAs have the same annual contribution limits and Uniform Coverage rules as general-purpose FSAs. However, you can only use an LPFSA for qualified dental and vision expenses, such as eye exams, prescription eyewear, contact lenses, cleanings, extractions, crowns, fillings, etc.

Double-dipping is not allowed. In other words, you cannot claim reimbursement for the same expense from your LPFSA and your HSA.

Use it or lose it, grace period, and Carryover also apply to your LPFSA. Check your plan documents to see which end-of-year spending option your plan offers.

Dependent Care FSA

A dependent care FSA is one of the most popular benefit accounts. DCFSAs (also known as Dependent Care Assistance Plans or DCAPs) can be used only to pay for the care of qualified tax dependents while you are working or at school.

Qualified Dependents

• Children who have not yet had their 13th birthday
• Children over age 13 who are physically or mentally unable to care for themselves
• Adult dependents (e.g., spouse or parent) who are physically or mentally unable to care for themselves

Contribution Limits

The IRS-mandated annual contribution limit for a DCFSA is $5,000 annually for married filing jointly or head of household or $2,500 annually for married filing separately. This amount is the same regardless of how many of your qualified tax dependents receive care.

Unlike the healthcare FSAs, there is no Uniform Coverage Rule. You can only spend the balance accrued in your account to date.

Eligible Expenses

You can use your DCFSA to pay for the following:

• Before- and after-school care
• Daycare, preschool, and Pre-K
• Summer day camps (overnight camps are not eligible)
• Adult/Elderly care programs
• Sick child care

Use It or Lose It

Dependent care FSAs do not offer grace periods or carryover. If you do not use your pre-tax dollars by the plan year’s end, you will lose them.