Understanding Flexible Spending Accounts

Use It or Lose It

The most common criticism you’ll hear about Flexible Spending Accounts is the “use it or lose it” rule. This means you MUST spend the dollars in your

FSA before the IRS imposed deadline. If you don’t spend it all,
you’ll forfeit any remaining balance. This is certainly not a reason to forego the account all together, but it does mean you should plan carefully when deciding the amount to set aside each year.

Types of FSAs

There are two main types of FSAs, each created to cover different types of expenses.

Health Care FSA

These funds may be used to cover non-reimbursed medical, dental, and vision expenses. The employer’s plan sets a maximum limit on contributions for these costs, usually $2,000 – $5,000. NOTE: Effective 2013, the maximum allowable contribution to a Health Care FSA will be $2,500.

Dependent Care FSA

Expenses for childcare and eldercare are covered by this account. You may contribute up to $5,000 for these costs depending on income tax filing status.

Benefits of Using FSAs

When you use an FSA, the government is effectively subsidizing some of your health care and dependent care expenses. Money set aside in an FSA is not subject to federal income taxes, state income taxes, Social Security taxes, or Medicare taxes.

By using pre-tax dollars to pay for eligible expenses, you’ll lower your taxable income and how much you will pay in taxes. The higher your tax bracket, the more you save.

Here is an example of how you might save. This example uses a single taxpayer with $2,000 in health care expenses.

Other Ways to Save

The IRS allows you to offset health care and dependent care expenses by claiming tax deductions for qualified health care expenses, and a tax credit for qualified dependent care expenses. Generally, an FSA is more financially advantageous than taking the deduction or credit. And, since everyone’s income, expense, and tax situation is different, it’s important to speak with a tax professional about the best choice for you.

If your employer offers FSAs, make sure you’re making the most of this valuable benefit. If you’re not sure if an FSA is available to you, ask a Human Resources representative. From prescription drugs to day care, if you’ve got an FSA, you may be able to get more for your money.