Flex Spending Account Guide for Individuals and Families

Flex spending accounts are a great way to save money on healthcare and childcare expenses. They allow you to set aside a portion of your income tax-free for eligible expenses.

You can have a flex spending account through your employer or open one on your own. Contributions to a flex spending account are made with pre-tax dollars, reducing your taxable income.

The annual contribution limit for a flex spending account is $2,850 for healthcare expenses and $5,000 for childcare expenses. These limits are subject to change, so it's essential to check the current limits before contributing.

You can use your flex spending account for a wide range of expenses, including copays, prescriptions, and over-the-counter medications.

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A flex spending account, or FSA, is a type of savings account that allows you to set aside a portion of your income on a tax-free basis for certain expenses.

You can use your FSA funds to pay for qualified medical expenses, such as doctor visits, prescriptions, and medical equipment.

Discover more: Health Savings Accounts Eligible Expenses

FSAs are often offered by employers as a benefit to their employees, and the funds are usually deducted from your paycheck before taxes are taken out.

You can also use your FSA to pay for dependent care expenses, such as daycare or after-school programs for your children.

FSAs are not just for medical expenses, but also for childcare expenses that allow you to work or look for work.

The funds in your FSA are use-it-or-lose-it, meaning you must use them by the end of the plan year or they will be forfeited.

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To be eligible for a flex spending account, you must be employed by a company that offers this benefit. You can check your company's benefits package to see if they offer a flex spending account.

The enrollment process typically occurs during open enrollment season, which usually takes place once a year. You can also enroll during a special enrollment period if you experience a qualifying life event, such as having a baby or getting married.

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To create an account, you'll need to decide which type of FSA you're eligible for. An FSA can be a great way to lower your bottom line if you have predictable, ongoing medical expenses during the year.

If you're paying for care for a child or dependent adult while you work, a dependent care FSA can be useful. A vast majority of parents (85%) report that they're spending 10% or more of their household income on child care.

To enroll in an FSA, you'll need to have a job that offers this benefit. You can use pretax dollars for health care and dependent care expenses, which can add up quickly.

You can use an FSA to pay for over-the-counter items like allergy and sinus drugs, first-aid supplies, and home COVID-19 tests. These expenses can be significant, especially if you have ongoing medical needs.

By enrolling in an FSA, you can set aside money on a pre-tax basis to cover these expenses. This can be a huge advantage, especially if you have predictable medical costs.

For your interest: Flex Spending Account Use It or Lose It

If you're planning to leave your job within the next year, you must spend any saved FSA money before you leave.

You should think about your health and any potential medical expenses you might have in the upcoming year when deciding how much to contribute to a FSA.

Contributing more to your FSA might be a good idea if you're pregnant or have a medical diagnosis that requires more frequent doctor's appointments.

If you're relatively healthy and only plan on going to the doctor for your annual wellness exam, you might contribute less money because you likely won't need the extra funds.

A flex spending account can be a great way to save money on taxes, allowing you to set aside a portion of your income for medical expenses or dependent care.

You can contribute up to $2,800 per year for medical expenses, or up to $5,000 per year for dependent care expenses, depending on your employer's plan.

Each year, you'll need to decide how much to contribute to your FSA, and you'll have until the deadline to make your contributions for the year.

For another approach, see: Dependent Care Flex Spending Account

Cafeteria plans offer a range of types to suit different needs. Flexible spending accounts are a common feature, allowing you to set aside money for medical and dependent care expenses.

You can use these accounts to cover a variety of qualified expenses, such as doctor visits, prescriptions, and childcare costs. Some plans may also offer accounts for adoption assistance, which can be a big help for families expanding their family.

Your FSA's coverage period is tied to your plan year, and it ends at the time your plan year ends or when your coverage under that plan ends. This means you need to use your FSA funds wisely.

For example, if you're employed from January through June and covered on your cafeteria benefits plan, including your FSA, during that time, your coverage period is only from January to June.

If you don't elect and pay for continued coverage under that plan, like through COBRA, your coverage period will not extend beyond June.

You can contribute up to $3,300 per year to an FSA through your employer.

To determine how much to contribute, consider your potential medical or health-care expenses for the upcoming year. If you're pregnant or have a medical condition that requires frequent doctor's appointments, you may want to contribute more to cover medications or copays.

Employers set the rules for rollovers, so check with yours to see if you can carry over funds from the previous year. You can carry over a maximum of $640 into the next year, but this doesn't affect the maximum contribution limit for the next year.

Your employer will withdraw a small amount each pay period over the course of the year, but you don't need to have the full amount in your account to start using it. If you've set aside $500 for the year, but your account only has $250 in it, you can still use your FSA to cover a $300 medical bill.

Consider whether you're planning to leave your job within the next year, as you must spend any saved FSA money before you leave.

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Over-the-counter (OTC) drugs and medical items are FSA-eligible, making it easier to "spend down" medical FSAs at year-end.

The IRS rules on what is and isn't eligible for OTC purchases can be rather arcane in practice, making it essential to have receipts that show the complete name of the item.

Effective January 1, 2020, over-the-counter medicines are allowable without a prescription or a note from a physician, a change made as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).

Menstrual care products are also now FSA-eligible, thanks to the same CARES Act.

The IIAS system references a master eligibility list of FSA eligible products at the point of sale, which is maintained by the Special Interest Group for IIAS Standards (SIG-IS) and updated on a monthly basis.

The FSA Eligibility List includes items within eligible healthcare product categories determined by the IRS, and Health Savings Accounts share the same medical item eligibility list as FSAs.

The requirement for prescription drugs was lifted, effective January 1, 2020, as per section 9003(c) of the Patient Protection and Affordable Care Act.

Here's an interesting read: Eligibility Verification & Prior Authorization

You can use your health care FSA for copayments, coinsurance, deductibles, prescription medications, over-the-counter drugs, menstrual products, and dental and vision care.

Some examples of eligible expenses include medicines prescribed by a doctor, blood sugar testing supplies, and birth control.

Here are some examples of eligible expenses:

Keep in mind that you can't use your health care FSA to pay for CBD products, vitamins (unless they're prenatal), or cosmetic procedures.

Employers can offer a 2.5 month grace period to spend leftover FSA funds, allowing you to use the money for up to 2.5 months after the end of the plan year.

In 2005, the IRS authorized this optional grace period, giving employers the flexibility to extend the use of FSA funds.

You can roll over the remainder of your accounts from 2020 into 2021 and from 2021 into 2022, thanks to the Consolidated Appropriations Act, 2021.

Employers can also offer a carryover option for health care FSAs, allowing you to carry over up to $570 from 2022 to the following year.

However, you can only use one carryover option for a health care FSA, so be sure to check with your employer to see what they offer.

Broaden your view: Defined Contribution Health Benefits

The FSA debit card was developed to eliminate "double-dipping" and simplify the substantiation requirement, making it easier for employees to access their FSA funds directly.

As of May 2006, there were approximately 6 million debit cards in the market tied to FSA accounts, representing 25% of the FSA participating community.

The debit card also enhances the effect of "pre-funding" medical FSAs, allowing employees to access their funds more easily.

However, the substantiation requirement itself did not go away, and has even been expanded on by the IRS for the debit-card environment, leading to withdrawal issues for FSAs.

Ecommerce companies have created websites dedicated to FSA-eligible items and accepting all FSA debit cards, providing a convenient solution for employees.

By 2010, it is projected that the average card participation rate will increase to 85%, up from around 20% as of May 2006.

You can contribute up to $2,850 in 2022 to a health care FSA, but you can only adjust your amount during open enrollment or a qualifying event.

To use a health care FSA, you can pay for copayments, coinsurance, deductibles, prescription medications, over-the-counter drugs, menstrual products, and dental and vision care.

Some examples of FSA-eligible expenses include medicines prescribed by a doctor, blood sugar testing supplies, breast pumps, and pain relief drugs.

You can't use your health care FSA to pay for CBD products, vitamins (unless they're prenatal), or cosmetic procedures.

To make it easier to use your health care FSA, some employers issue debit cards that allow you to pay for eligible expenses at the point of sale.

However, even with debit cards, you'll still need to provide itemized receipts for all expenses charged to the card, unless you use the card at a pharmacy or grocery store that complies with the IRS procedure.

The IRS allows employers to waive the requirement for itemized receipts when an individual uses the debit card at a pharmacy or grocery store that complies with the procedure, or when the amount charged to the card is a multiple of a co-pay of the employee's group health insurance plan.

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Here are some examples of FSA-eligible expenses:

Over-the-counter medicines are now allowable without a prescription, and menstrual care products are also eligible expenses, thanks to the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).

Pre-funding and risks incurred by the employee and employer can be a complex issue.

The entire annual contribution to a medical FSA is available at the start of the plan year, which can be a huge benefit to employees who experience a qualifying event early on.

If an employee is terminated, quits, or is unable to return to work, they don't have to repay the money to the employer, which can be a relief.

The employer typically pays only a small administrative fee to the plan, around $4-10 per month per participating employee, which is a significant cost savings.

If a company plans to lay off some employees and announces such plans, it may cause the company to have to reimburse the plan if multiple employees use their entire flexible benefit before being terminated.

Employees do not continue to contribute to the plan upon termination of employment, which means they can use the entire amount on day one of the plan year and contributions would be negligible.

The "free" money is not taxable because the IRS views these plans as health insurance plans for tax purposes.

The employer has to make up the difference that the employee has spent from the flexible spending account but not yet contributed if other employees' contributions do not account for the money spent.

On average, up to 14% of the total employee contributions are not used by the end of the plan year or grace period, which can be a substantial boon to the employer's bottom line.