If you have health care through your employer, it’s possible that you have access to a Flexible Savings Account (FSA). The money in this account can be used for qualified medical expenses like copayments, prescription costs, and more. Flexible Spending Accounts can be a fantastic way to get out in front of medical expenses that crop up over the course of the year, and they come with some excellent tax benefits, as well.
What is an FSA?
A Flexible Spending Account (FSA) is an account connected to a health care plan offered through your workplace. The account is funded with pre-tax dollars which means you’re both lowering your taxable income and putting money aside for medical expenses. You aren’t required to contribute to your FSA, but in some cases, your employer might offer a one-to-one match, up to a preset limit.
There are two different kinds of Flexible Spending Accounts — Health Care and Dependent Care. Your Health Care FSA is intended for medical expenses, and a Dependent Care FSA is for dependent care costs like daycare, preschool, or summer camp while you’re at work. For the purpose of this article, I’m focusing on Health Care FSAs, although it’s a good idea to check and see what types of flexible spending account options your employer offers.
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What you need to know about your FSA
Although they may seem like an ideal way to save pre-tax dollars for potential medical emergencies throughout the year, FSAs come with a unique set of stipulations that you’ll need to navigate around.
First, FSAs have a contribution limit of $2,650 per employer (if you’re single). If you’re married, your spouse can put in an additional $2,650 through his or her employer. This may not seem like a notable amount, but it’s often enough to cover a family’s medical expenses for a year (barring any unexpected broken bones or hospital stays).
Second, you don’t own your FSA. Your FSA is owned by your employer, and won’t transfer to a new employer if you leave your current position. Because your FSA is owned by your employer, they make the rules when it comes to your account. One of the most common things that employers do with their FSA program is to put restrictions on whether or not you can use the funds in the account from year to year.
There are typically three different ways employers set up their FSAs. First, they might offer an FSA Grace Period. The Grace Period means that you get to use the funds for up to 2 ½ months into each new year before they go away. Second, they might offer an FSA with Carryover, which means you can take up to $500 into the next year but would lose any additional unused funds in the account. Finally, they might offer no carryover or grace period option, and any funds you’ve set aside in the account but failed to use on eligible expenses this year will be lost on January 1st. Regardless of what option your employer offers, it’s safest to take a “use it or lose it” approach to the funds in your FSA.
Third, you might not need to max out your FSA contributions each year. It’s tempting to save up to the maximum to cover any potential emergencies, but that can backfire since you run the risk of losing some of the funds if you are unable to spend your entire balance on qualified expenses.
What can you buy with an FSA?
If you’re looking at your FSA balance right now feeling unsure of how to spend it before the end of the year, you’re not alone. Many people panic as they near the end of the year and still have funds to spend. They don’t want to lose their hard-earned money, but they also don’t have any upcoming medical expenses planned.
It’s true that you have to spend your FSA funds on qualified medical expenses, but you might be a little confused about what, exactly, qualifies as such. You’re not nearly as limited as you might think. Before you go running out the door to purchase thousands of band-aids to use up your funds, here are some ways you can use your FSA funds that you may not have considered.
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Alternative healthcare and dental care
Have you always wanted to give acupuncture a shot? Do you need to go to the chiropractor to fix your constantly-crunching back? Did you miss your mid-year dental cleaning? Now’s the time to capitalize! Book the medical appointments you’ve been putting off for months for the whole family.
No matter where you’re at in life, speaking with a therapist can help to equip you with the tools to handle the stresses of life as you continue on your journey.
If you and your spouse have been considering couple’s counseling, even as a tune-up, or if you feel like your anxious child could benefit from sessions with a psychologist, book them before the end of the year. Cost is an obstacle to mental health care for so many Americans The money in your FSA can be used for these expenses.
Your service animal is technically a dependent covered by your FSA! The cost of your service animal is covered, as well as ongoing medical, food, and grooming expenses all qualify.
Stock up on medical supplies
Bandaids, prescriptions, vitamins, first aid kits for each of your family vehicles – all of these things qualify as medical expenses covered by your FSA. If your family goes through a large quantity of any of these things, load up now!
Breast pumps and supplies
If breastfeeding is in your future, or your current reality, you know all too well that breast pumps and supplies can be incredibly costly. Even if you’re currently pregnant and aren’t ready to start breastfeeding just yet, buying the equipment you need ahead of time while the funds are there can save you money next year when you’re on maternity or paternity leave.
Technically, you’re supposed to update your eyeglass prescription every 6-12 months. If you’re like many people, you may have let this slide for too long. Book appointments for everyone in the family — optometry appointments for your kids, contact lenses, glasses, and frames are all qualified expenses. And, yes, lasik procedures are also a qualified FSA expense.
Miscarriage and infertility affect 1 in 4 women in America. Hospital bills from a miscarriage can be hefty, as in thousands of dollars. And the sky is practically the limit on fertility treatments. Whether you’re looking at in vitro fertilization, or you’re still in the “discovery” phase, you can take full advantage of your FSA.
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Are you claiming an aging parent as a dependent this year? If they require any home health care, you can use your FSA to cover the expenses.
Transportation and lodging
If you paid out of pocket for transportation or lodging in order to receive medical care, you can submit a reimbursement claim to use funds from your FSA to cover those costs.
Check the FSA store
The FSA Store is an online marketplace full of medical supplies and more that qualify as expenses covered by FSA funds. You can find everything from prenatal vitamins to insulin — all in one place.
What to know for next year
The new tax code has dramatically impacted many different aspects of our financial lives, but FSAs have moved through the transition largely untouched. The only major change you need to be aware of is that the contribution limit was increased by an additional $50 (per employer) for the 2019 tax year.
It’s tempting to continually max out all of the tax-advantaged accounts you have available to you, but you don’t want to put yourself in a position where you lose your money. Over-saved this year? It may be smart to reconsider your annual medical expenses budget.
Expenses that you can guarantee are usually a safe bet, like doctor visit copays for annual exams and child wellness visits. If you’re still worried about how to walk the line between tax savings and losing money in your unused FSA, you should consider talking to a financial planner to help you work through the best strategies to maximize your money and avoid making costly mistakes like underusing the funds in your FSA.
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Mary Beth Storjohann, CFP® and Founder of Workable Wealth, is an author, financial planner and accountability partner working to help clients in their 20s-40s across the country make smart, educated choices with their money. Her recent accolades include the “Top 40 Under 40” by Investment News, “10 young Advisors to Watch” by Financial Advisor Magazine, and “10 of the Best Personal Finance Experts on Twitter.” She frequently appears on NBC as a financial expert and her expertise has been featured in The Wall Street Journal, CNBC, Forbes and more. Opinions are her own.
Haven Life Insurance Agency offers this as educational information. Haven Life does not offer investment or tax advice and encourages you to seek advice from your own legal counsel, investment advisor, or tax professional.