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by Teddy Nykiel
Flexible spending accounts, or FSAs, are pre-tax dollars taken out of your paycheck that can be used to cover out-of-pocket medical costs such as copays, prescriptions, dental work and vision care. Here’s what you need to know to get the most out of your FSA.
1. They’re available through your employer.
FSAs are an employer-offered benefit, with contributions taken out of your salary before federal and employment income tax each month. It’s a way to reduce your taxable income and set aside money exclusively for health purposes. Employers can contribute to your FSA as an added benefit.
Helen Huntley, a financial advisor from St. Petersburg, Florida, warns consumers not to confuse FSAs with other health savings accounts (HSAs) or health reimbursement accounts (HRAs), which have different contribution limits and rules.
2. You can contribute up to $2,500 each year.
Each year during open enrollment, you can choose how much to contribute to your FSA for the following year. Determine this amount based on how much you’ve spent on medical costs in the past and how much you expect to spend the next year. Be precise in the amount you set aside because you could lose funds you don’t use.
Consumers should look back through their out-of-pocket medical expenses from past years to estimate how much they spend in a year, says Peter Ashby, a financial advisor in Roseville, California.
“If expenses vary from year to year, I would recommend deferring an amount similar to the year with the least amount of expenses, since the unused money in the account will be forfeited back to the employer, which could possibly negate any tax savings received from the plan,” Ashby says.
3. They ‘expire’ every year.
You must spend your FSA money within the year or risk losing it. However, there are two exceptions. Some employers offer a grace period, which gives employees an extra 2½ months to spend the remaining money. Other employers let you carry over $500 to the next year. Employers are allowed to offer one of these two exceptions, but not both, and they don’t have to offer either.
Consumers should review their FSA accounts in November to see how much money is left, Ashby says.
“If it looks like they are going to have extra funds in their account, I would tell them to stock up on supplies that will be needed down the road,” he says, listing Band-Aids, eye drops, thermometers and contact solution as examples.
Huntley recommends using unused FSA funds to get dental work or other optional medical procedures done at the end of the year.
4. They’re used for out-of-pocket medical costs.
FSA funds are used to pay for health costs not covered by insurance. The Internal Revenue Service provides a full list of qualified medical expenses. Common uses of FSA funds include copayments, co-insurance, deductibles and medications, as well as optometry and dental care. You can also purchase medical supplies like bandages, crutches, breast pumps, birth control and pregnancy tests, and pay for services including stop-smoking programs, vasectomies and psychological treatment.
Service animals, home improvements for medical purposes, and parking, lodging and meals related to a hospital stay are also eligible expenses, says Carrie Houchins-Witt, a financial advisor in Coralville, Iowa.
You can’t use FSA funds on insurance premiums, gym memberships, cosmetic surgery, over-the-counter drugs, teeth whitening, vitamins or supplements, among other things.
Open enrollment for employers is typically toward the end of the year, so take advantage of the opportunity to sign up for an FSA with your employer—it will save you money in tax dollars and fund the services you need to stay healthy.