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Health Savings

What is an FSA and how does it work?

6 minute read

What is an FSA?

An FSA, or Flexible Spending Account, is a tax-advantaged financial account that can be set up through an employer's cafeteria plan of benefits. If you have a Health FSA (also sometimes called a Medical FSA), you can use it to pay for eligible out-of-pocket medical expenses with pre-tax dollars. When you open a health FSA, your employer puts an agreed-upon portion of your gross income into a special medical expenses "tax shelter." This decreases your taxable income (and tax burden) and helps you budget for out of pocket medical, dental and vision expenses.

How to set up an FSA?

In order to set up health FSA, your employers must offer it as an employee perk. You can't open one on your own — you can only get one through your job. About 85% of large companies offer healthcare FSAs, and an estimated 33 million employees use them to cover out-of-pocket medical costs.1 Ask your company if they offer FSAs and how you can enroll.

What's the main benefit of having an FSA?

An FSA can save you money because it allows you to pay for unreimbursed medical expenses with pre-tax dollars. The amount of money you save with an FSA depends on the amount you spend on eligible medical expenses and the amount you put into your FSA. For example, if your annual income tax rate is 30% (federal and state tax combined), enrolling in an FSA could save you $30 for every $100 you put into the account and spend on eligible costs.2

That means, at the 30% tax rate, if you earn $50,000 a year and put $2,000 into an FSA account, you might save $600 for that year.3

What can I spend my FSA on?

You can use your health FSA funds to pay for many out-of-pocket medical expenses and drugstore items not covered by insurance can be paid for with FSA funds. In order to be considered an eligible expense, some over-the-counter medications may require a doctor's prescription, but many everyday health-related items do not. FSA-eligible costs include a wide range of products and services including:

  • Co-pays
  • Coinsurance
  • Deductibles
  • Bandages
  • Baby Sunscreen
  • Contact Lens Solution
  • Allergy Medicine
  • Cough Drops
  • Pain Relievers

There are many more expenses that are FSA-eligible. For a full list, and to learn what requires a doctor's prescription and what does not, go to https://fsastore.com/FSA-Eligibility-List.aspx

What expenses cannot be paid for with FSA funds?

Many health and wellness costs are considered ineligible expenses for FSAs. Some examples include:

  • Insurance premiums
  • Toiletries
  • Diapers
  • Cosmetic procedures (with some exceptions)
  • Teeth whitening (with some exceptions)
  • Toothbrushes
  • Mouthwash
  • Marriage or family counseling

For a comprehensive list of expenses that are not eligible to be paid through an FSA, go to https://www.probenefits.com/participants/learn/non-eligible-expenses.

What is the max contribution to put into an FSA?

Every year the IRS determines how much gross income you can put in your FSA. The maximum amount for 2019 is $2700.4 However, even if your employer offers FSAs, they're not obligated to allow the maximum amount. Check with your human resources department to see if your company allows you to contribute the IRS maximum.

Can I decide how much or how little to put into an FSA?

While you can't contribute more than the IRS and your employer allow, you can always contribute less than the maximum amount. To determine how much you want to put into your FSA, consider the amount you spent on FSA-eligible expenses last year. Then do some math to add or subtract depending on what you estimate your out of pocket medical costs will be for the current year.

Does my employer divert pre-tax income into my FSA each pay period, and if so does that mean I only have access to the amount that's accrued so far?

No, you don't have to wait for your contributions to build up in your FSA — you will have access to the entire agreed-upon lump sum at the beginning of the year. Even though your employer calculates how much pre-tax income goes into your FSA from each paycheck, it is essentially reimbursing itself after funding your entire annual FSA up front.

Once I open an FSA, how do I access the funds to pay for expenses?

The way you access funds from your FSA depends on how your employer's FSA system is set up. Some FSAs allow you to access funds through a debit card, while others require you to pay up-front on eligible items and then submit receipts for reimbursement through your FSA. The advantage of using a debit card is the convenience of it, but the downside is that it may be easier to inadvertently use it to pay for expenses that aren't FSA-eligible. If you do, there may be a penalty assessed by your employer.5

In any case, most FSAs do require you to submit paperwork so it's a good idea to get in the habit of keeping records and receipts for what you spend on eligible expenses.

Are there any disadvantages to having an FSA?

There are pros and cons to FSAs and making the most of your FSA can be tricky. The key is to make sure you don't put in more than you will spend on eligible expenses for that year. For 30 years, FSAs had a "use it or lose it" rule, meaning if you contributed more money to your health FSA than you spent on eligible expenses by the end of the year, you would lose the money — and your company would actually get to keep it to help pay its administrative costs.

But the good news is, the Affordable Care Act has made FSAs more attractive by allowing a roll-over of up to $500 of unused funds at the end of the year and/or a 2 ½ month grace period to spend any unused funds.6 However, even though your employer can now offer the rollover and grace period options, they are not obligated to do so. So before opening an FSA and determining the amount to put into it, research your company's particular rules.

Will my employer contribute to my FSA?

Employers, employees, or a combination of the two can contribute to an FSA. The typical employer contribution is between $500 and a match of an employee's contributions7, although employers aren't obligated to contribute anything. Keep in mind that whatever your employer puts in won't lower your taxable income, but it will give you more money to spend for that year.

Is a Flexible Spending Account worth it?

With proper planning and organization, an FSA can be worth it by lowering your taxable income which saves you money. Consider what you spend on FSA-eligible medical expenses each year and ask your employer about the specifics of your company's plan. Only you can decide if an FSA is right for you.

Sources:
1 "What is a Flexible Spending Account (FSA) — Rules & Eligible Expenses," Michael Lewis. Retrieved from https://www.moneycrashers.com/flexible-spending-account-fsa-rules/
2 "What is a Flexible Spending Account (FSA) — Rules & Eligible Expenses," Michael Lewis. Retrieved from https://www.moneycrashers.com/flexible-spending-account-fsa-rules/
3 "Flexible Spending Accounts: A Once-A-Year Tax Break," turbotax. Retrieved from https://turbotax.intuit.com/tax-tips/health-care/flexible-spending-accounts-a-once-a-year-tax-break/L8hwzKu7r
4 "2019 FSA Contribution Cap Rises to $2,700, IRS Belatedly Announces," Stephen Miller, November 16, 2018. Retrieved from https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/2019-fsa-contribution-limits.aspx
5 "Tax Guide," 1040.com. Retrieved from https://www.1040.com/tax-guide/health-and-life-insurance/withdrawing-from-an-fsa
6 "'Use it or Lose It Rule' for FSAs Goes Away," Barb Rand. Retrieved from https://www.hni.com/blog/bid/87708/use-it-or-lose-it-rule-for-fsas-goes-away
7 "'FSA Employer Contribution Rules," Cinnamon Janzer, October, 2018. Retrieved from https://www.zenefits.com/blog/fsa-employer-contribution-rules/
*Subject to credit approval. Minimum monthly payments required. See carecredit.com for details.

This content is subject to change without notice and offered for informational use only. You are urged to consult with your individual business, financial, legal, tax and/or other advisors and/or medical providers with respect to any information presented. Synchrony and any of its affiliates, including CareCredit,(collectively, "Synchrony") makes no representations or warranties regarding this content and accept no liability for any loss or harm arising from the use of the information provided. Your receipt of this material constitutes your acceptance of these terms and conditions.
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