A Flexible Spending Account, or FSA, is a great way to save on taxes and set aside money for health and childcare expenses.
The basics of FSA accounts are pretty simple. Each payday, you set aside funds before taxes are taken out to help pay for eligible expenses. You can’t spend the money on just anything, though. There are several different kinds of FSAs, and they each have their own rules.
First are Health FSA accounts, which are used to pay for healthcare expenses that insurance doesn’t cover. You can pay your co-pays, deductibles, prescriptions, and other treatments. You can also use it for vision, dental work, and even for some supplies like bandages. A complete list of eligible expenses is available from the IRS. You can also ask your benefits representative for more information.
Another health-related FSA is the Limited Purpose FSA (LPFSA). An LPFSA can only be used for eligible vision and dental expenses. The unique thing about Limited Purpose FSA accounts is that you must have a Health Savings Account (HSA) to sign up for one. With both accounts, you can maximize your tax and savings benefits.
Another common type of FSA is not health-related at all. It’s called a Dependent Care FSA, Dependent Care Assistance Plan, or DCAP for short. A DCAP is used for childcare, before- and after-school care, and care for elderly or disabled dependents. For this purpose, dependents include children up to age 13 and other relatives incapable of self-care.
There are limits on how much money you can put into FSA accounts which are set each year by the IRS. Check with your benefits representative to find out about annual contribution limits.
Another great thing about FSA accounts is that even though the money is taken from your paycheck throughout the year, you can spend the entire amount starting on the first day for an eligible expense. This is because of what is known as the Uniform Coverage Rule. For instance, if you have a big expense in January, you can spend the entire amount you plan to set aside for the year even though your contributions haven’t built up yet.
When deciding how much money to set aside, it’s important to know how your plan handles leftover funds. All DCAP accounts are “Use it or Lose it.” However, health FSAs can be handled in one of three ways: Use it or Lose it, Carryover, or Grace Period.