Beyond the [Employee Benefits] Basics: Flexible Spending Accounts (FSAs)
It’s that time again: Open enrollment season!
If your employer offers benefits, you’ve got to decide what to do before your deadline. Sure, you’ll need the basics, like health, vision, and dental insurance. (If you’re looking for those basics, check out Jason’s blog on it! Back to Basics: Employee Benefits.) And you should definitely take any employer-paid life insurance or other options you don’t have to pay for. (Why pass up the freebies, amirite?) You’ll also want to enroll in long-term disability coverage. You might even want to take up your employer on that triple-tax-advantaged health savings account (HSA) option if you go with a high-deductible health plan (HDHP).
But what about that flexible spending arrangement (FSA)?
The FSA is one work perk that I often field questions about, so I wanted to share some of what I know about FSAs so you can make an educated decision on whether to enroll.
What Is an FSA?
A flexible spending arrangement (FSA) is a type of savings account. It allows you to save tax-free, which means that the dollars you earn go straight into the FSA before taxes are taken out. You then pay for eligible expenses out of pocket and submit the receipt and any related documentation to your FSA provider. If your claim is indeed a covered expense, you get a reimbursement. And when you receive that reimbursement, it’s not taxed either!
Plus, since the dollars come out of your paycheck before they’re taxed, FSA contributions reduce your taxable income. Hooray for tax perks!
But before you get too excited about saving — and saving tax dollars — there are some other things about FSAs that you should know.
You must choose whether to enroll in an FSA during open enrollment, and you generally can’t make changes to your enrollment or your contribution outside of this time frame.
FSAs are “use it or lose it.” You’re generally required to use all of the funds in your FSA by the end of the plan year. However, some employers allow you an extra two and a half months in the following year to use your FSA funds. And if your deadline isn’t extended to the middle of March, your employer may allow you to roll $610 to the following plan year. One final note on the use-it-or-lose-it nature of FSAs: Your employer can offer the mid-March extension or the $610 rollover, but not both. And they might not offer either, so don’t forget to use your FSA funds!
There are two main types of FSAs. One allows employees to save for medical, dental, and vision, and the other does the same for dependent care needs. And although those categories may seem broad, only certain expenses within each category are eligible for reimbursement. Let me break it down.
A medical or health care FSA is for — you guessed it — health-care-related expenses. If you elect to use your medical FSA, you can contribute up to $3,050 for the 2023 benefit year. If your spouse’s employer also offers them an FSA, they can contribute the same amount to their FSA, too. And you can submit requests for reimbursement on behalf of yourself, your spouse, and your children.
One great perk of medical FSAs: If you elect to contribute, that full amount is available on day one of your benefits year.
Yes, that’s true even if you don’t plan to work for that employer for the full year due to a job change or retirement.
No, you don’t have to pay it back if you use the full amount before you leave your employer.
Yes, you need to use it before you leave your employer since FSAs are employer-based. Remember, if you don’t use it … you lose it!
Remember that your contribution will be split up and taken out of your paychecks evenly throughout the year.
If you have a health-savings-account-eligible high-deductible health plan (aka an HSA-eligible HDHP), you can only use your medical HSA for out-of-pocket dental and vision expenses. But if you don’t have an HDHP, you can use your HSA for out-of-pocket vision and dental expenses and many things medical, like …
- Deductibles and copays for medical care and treatment
- Medical equipment and devices
- Over-the-counter medicines that were prescribed
What can’t you use your medical FSA on? Premiums, for one. Other health care FSA no-gos include elective cosmetic surgery, vitamins that aren’t prescribed, and your gym membership, among others. If you’re wondering if your expenses might be reimbursable, check your FSA website or ask your human resources department.
Dependent Care FSAs
Dependent care FSAs are designed to help working caregivers … work! They’re designed to help employees save and pay for care for children under 13 (that’s up to age 12) and other dependents.
If you choose to use your dependent care FSA, your contribution limit is different than a medical FSA. You can contribute up to $5,000 if you’re married and you and your spouse file a joint tax return. If you’re single or you file separately from your spouse, that maximum gets cut in half at $2,500.
Another difference between dependent care and medical FSAs: You can only use your dependent care FSA funds after they’ve been taken out of your paychecks and put into the FSA. The dollars aren’t available until they land in your FSA.
Here’s a quick list of expenses you can use your dependent care FSA for …
- Before- or after-school childcare
- Adult day care services for tax dependents or your spouse with mental or physical disabilities, if their residence is the same as yours
- Summer camps, clubs, and activities
On the other hand, you can’t use a dependent care FSA for things like …
- Care for children 13 years old or older
- Date-night babysitters
- Sleepaway or overnight summer camps
Think about it this way: If paying for care allows you to work, it might be dependent-care-FSA-eligible. If you’re not sure, check with your FSA provider or your HR team.
To Enroll or Not to Enroll?
You might be asking yourself, “Why not take the tax advantage?” This is a great question since FSAs are a beneficial benefit.
Sure, there’s the risk of losing the dollars you put in if you don’t use them. It’s also true that you might seek care or make a purchase that you believe is eligible for reimbursement … only to find that it’s not. Or you might contribute too much and not use all of those dollars. You know what happens then!
Another consideration for those thinking about using the dependent care FSA is the child tax credit and which might be the better option for 2023. If your mind is on this one, don’t forget to schedule your tax planning consultation with Jason!
How Much to Contribute
If you’re leaning toward using an FSA. Here are some tips for figuring out how much to contribute …
Calculate how much you know you’ll use.
If you know you’ll use it, do it! For example, if you’re expecting a high-cost health care year in 2023 or always have high health care expenses due to a medical condition, you might want to consider contributing the maximum.
Or, if you know that your dependent care expenses will exceed the maximum, you may want to contribute the max.
If you’re expecting a health care or child care expense year in 2023 similar to this year, add up what you’ve already spent. Then, estimate what you’ll spend in this next month and a half. Contribute that much — or slightly less, if you’d like to play it safe.
If you don’t know, don’t contribute. This might be a better course of action if you’re living somewhere new, seeing new health care or child care providers, or you just haven’t had an FSA as an option before. In cases like these, you may want to “wait and calculate.” Skip the FSA this year, and keep track of your eligible expenses. Then you’ll know how much to contribute next year.
One way to do this: If 2023 will be a “usual” expense year, save your receipts for eligible expenses. Keep a spreadsheet or simple note on your phone. (You can even use old-school pen and paper.) When your next open enrollment window comes around, add it up and elect to contribute that amount.
Didn’t put enough in because that next year was more expensive than you thought? (Thanks, health care inflation!) Don’t worry! You still saved some tax dollars by basing your contribution on known expenses — and you didn’t lose any FSA dollars.
Put too much in? Get that fancy pair of glasses frames or high-tech lenses. Or stock up on other FSA-eligible products to use it up. See if you can have that dental procedure a little earlier than planned. Try to use it, but don’t be too hard on yourself if you don’t get around to it. It’s not the end of world — and I’ll bet you won’t overcontribute again in the future.
If you’ve decided to enroll in and contribute to an FSA, no matter the type, I have one last bit of advice for you: Don’t forget to use it!
If you’ve got questions, reach out! I’m offering special meetings throughout November that focus on insurance planning. Sure, employee benefits — and FSAs in particular — might not fit that mold perfectly. But I do these twice a year! So if it’s your open enrollment season and you have questions, let’s meet. Then we can focus on your home, auto, umbrella, and related property and casualty (P&C) insurance in six months or so.
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