A flexible Spending Account (FSA) is a savings account that offers the account holder particular tax benefits. An employer may set up an FSA for employees, also known as a "Flexible Spending Arrangement." You can contribute a portion of your regular income to the account, and employers are also permitted to do so. The employee must use distributions from the account to pay for qualified medical and dental expenses.
How Does It Work?
One of the main advantages of an FSA is that your earnings before taxes are deducted for the money you contribute to the account, lowering your taxable income. Regular FSA contributions can therefore lower your yearly tax burden. The amount that can be paid into an FSA account each year is capped by the Internal Revenue Service (IRS).
Quick Facts Regarding FSA
FSA has an annual cap of $2,850 per employer. If you're married, your spouse may also fund an FSA through their employer for a maximum of $2,850.
If you're married and have dependents, you can use money from your FSA to cover some of their medical and dental costs.
FSA funds can cover copayments and deductibles, but not insurance premiums.
Both over-the-counter medicines with a prescription from a doctor and prescription medications are eligible for FSA reimbursement. Without a prescription, insulin reimbursements are accepted.
Medical supplies like bandages, crutches, and diagnostic tools like blood sugar test kits can be paid for with FSAs.
FSA Constraints and Grace Period
The funds saved in an FSA typically have to be spent by the plan year's end. However, a plan may grant a grace period to use that funding for up to 2.5 months. If you choose not to use that option, a plan might let you roll over up to $550 in unused account balance each year. Although neither choice is necessary, the plan may only present one. Any money in your FSA still at the end of the year or after the grace period has passed is lost. The amount of money you want to deposit into your account and how you envision using it throughout the year should be carefully calculated.