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What is a Flexible Spending Account (FSA)?

A Flexible Spending Account (FSA) is an employer-sponsored benefit that allows employees to set aside pre-tax dollars for specific types of expenses. There are three main types of FSAs:

• Healthcare FSAs: These accounts are used for medical, dental, and vision expenses that are not fully covered by your health insurance.

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• Limited-Purpose FSAs: Designed for employees who also have a Health Savings Account (HSA), these FSAs are limited to dental and vision expenses.

• Dependent Care FSAs: These accounts are for childcare or care for dependent adults.

FSAs are funded through pre-tax payroll deductions, meaning the money is taken out of your paycheck before taxes are applied. One of the unique features of FSAs is that the full amount you elect to contribute for the year is available to you at the start of the plan year, even though you haven’t yet made all the payroll deductions.

How FSAs Work

Contributing to an FSA involves setting aside a portion of your income each month through payroll deductions. For 2024, the IRS has set annual contribution limits at $3,200 for healthcare/general purpose and limited-purpose FSAs, and $5,000 for dependent care FSAs. Employers may choose to set lower limits if they wish.

Once you’ve contributed to your FSA, you can use these funds to pay for qualified expenses. This can be done through an FSA debit card or by submitting receipts for reimbursement. The tax advantages of using an FSA are significant; contributions reduce your federal income tax, Social Security tax, and Medicare tax.

Eligible and Ineligible Expenses

Understanding what expenses are eligible for reimbursement through your FSA is crucial. Here are some examples of eligible expenses:

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  Copays and deductibles

• Prescription medications

• Dental and vision expenses

• Dependent care costs, such as daycare fees or after-school programs

For some items, like over-the-counter medicines, you may need a doctor’s prescription to qualify for reimbursement. It’s important to check with your FSA administrator for specific guidelines on what is covered.

Contribution Limits and Rules

The IRS sets annual contribution limits for FSAs, but employers can choose to set lower limits if necessary. Here are some key rules to keep in mind:

• Annual Contribution Limits: As mentioned, these are $3,200 for healthcare/general purpose and limited-purpose FSAs, and $5,000 for dependent care FSAs in 2024.

• Use It or Lose It Rule: Generally, any unused funds at the end of the plan year are forfeited. However, some employers offer a grace period (up to 2 ½ extra months) or a carryover option (up to $660 in 2024).

Understanding these rules can help you plan your contributions more effectively.

Types of Flexible Spending Accounts

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Each type of FSA serves a different purpose:

Healthcare FSAs

These accounts cover a wide range of medical, dental, and vision expenses not fully paid by your health insurance. From copays and deductibles to prescription medications and eyeglasses, healthcare FSAs provide significant financial relief.

Limited-Purpose FSAs

For employees with an HSA, limited-purpose FSAs are restricted to dental and vision expenses. This ensures compliance with HSA regulations while still offering some pre-tax savings opportunities.

Dependent Care FSAs

Designed for childcare or care for dependent adults, these accounts help cover costs such as daycare fees, after-school programs, or elder care services.

Enrollment and Administration

Enrolling in an FSA typically occurs during your employer’s open enrollment period or when you first become eligible for benefits. Here are some key points:

• Eligibility Criteria: You must be an employee of the sponsoring company to participate.

• Annual Reelection: You need to reelect your FSA contributions each year during open enrollment.

Employers play a crucial role in administering FSAs by partnering with an FSA administrator who handles the day-to-day management of the accounts.

Security and Identity Verification

To ensure the security of your FSA account, identity verification processes are in place. This may include using services like Login.gov or in-person verification at U.S. Postal Service locations. These measures protect your personal information and prevent unauthorized access to your funds.

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