What is a flexible spending account?

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Medical doctor with piggy bank, calculator and cash
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People often have a lot of questions about signing up for health insurance at work. One of the most common is: “What is a flexible spending account?”

Here’s what you need to know about flexible spending accounts

Beginning each November, many employees get to do open enrollment at the workplace. It’s easy to just focus on picking a health care plan at work from the available offerings. But don’t forget about those flexible spending accounts (FSAs), too!

An FSA gives you a chance to pay for qualified out-of-pocket medical expenses and more using pre-tax dollars. So doing an FSA lowers your taxable income every year that you do one, which keeps more money in your pocket.

“This is a way to take tax money back from Uncle Sam,” money expert Clark Howard says. “It’s like getting an automatic raise.”

Table of contents

How a flexible spending account works

With an FSA, you elect during the open enrollment period to have your employer automatically deduct money out of your gross pay each pay period.

That money is essentially put into a savings account that’s funded with your pre-tax dollars. Then, over the course of the following year, you can take those pre-tax dollars and use them to reimburse yourself for qualified medical expenses.

According to the Internal Revenue Service, the 2019 FSA contribution limit for employees is $2,700. That’s up $50 from the prior year’s limit.

If you’re married, your spouse can contribute an additional $2,700 in an FSA with their employer, too.

But note this: You must work for an employer that provides a health plan to do an FSA. Self-employed individuals are not eligible.

If you do have access to an FSA, there is one major caveat to be aware of: You’ve got to use it or lose it when it comes to your FSA money. If there’s unused money left over at the end of the year, you often won’t get it back.

Some employers may permit you to bring $500 into the next year as a carryover option for future eligible expenses.

Still other employers may offer a grace period option whereby you have two and a half months into the new year — that is, until March 15 — to use the money or lose it.

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But employers aren’t required to offer either the carryover or the grace period. So if you elect to do an FSA, make sure you’ll use the money.

Types of FSAs

There are actually three types of FSAs, but the first two are more common:

  • Health care FSA
  • Dependent care FSA
  • Limited-purpose FSA

The health care FSA can be used to take care of unreimbursed medical bills like deductibles, co-pays, medications, eyeglasses, dental care and more.

The second type of FSA is earmarked for your dependents. For example, you can use the money in this FSA to pay for daycare, preschool or summer camp for your child or children. Other qualifying uses of this money include paying for an elderly relative or other adult who needs special care.

You can sign up for both types of FSAs; one but not the other; or none at all. The choice is yours!

Finally, there’s a third type of FSA called a limited-purpose FSA. This little-known variation works in conjunction with a health savings account to help pay for certain dental and vision expenses.

Enrolling in an FSA

Signing up for an FSA is easy if your employer offers this benefit. When it’s open enrollment time at work, be sure to talk with the human resources department to find out exactly how to do it at your company.

In general, you’ll follow this three-step process:

  1. Calculate what you’re likely to spend on health care or dependent care in the following year.
  2. Figure out if your employer is contributing any money to the FSA — some employers do and some don’t.
  3. Decide on how much you want to contribute.

Once you’ve signed up for the FSA, you’re going to see the money you’ve agreed to put aside pre-tax come out of your paycheck at the start of the following year. But don’t worry — it won’t all come out at once. Rather, you’ll get equal amounts deducted from every paycheck.

Let’s say, for example, that you elected during open enrollment to set aside $2,000 and are paid twice a month (24 pay periods). You should expect an FSA deduction of roughly $83 out of each check in the upcoming year (24 pay periods x $83.33 = $2,000).

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After you’ve started contributing to an FSA, some employers will automatically roll over your previous year’s elections to each new plan year. But if they don’t automatically do that, you just have to re-enroll and select your deduction amount anew during each subsequent open enrollment period.

How to use an FSA

Once you have FSA money that you’ve built up during the course of the year, you’ve got to be sure you rack up some eligible expenses so you can draw that money down. Remember, this is “use it or lose it” money!

Fortunately, using it is pretty easy and just involves submitting a claim for eligible expenses.

Paychex flexible spending account (FSA) screenshot
Paychex flexible spending account (FSA) screenshot

Whoever handles payroll processing for your employer would typically be the one who administers your FSA. So that’s who you would go to when you’re ready to submit a claim for reimbursement.

ADP and Paychex are two of the heavyweights in the industry, though there are a number of other smaller players, too.

The process of submitting a claim for your FSA money is easy enough. You’ll just need to upload an itemized receipt, either online or via a dedicated app from the payroll processor.

Eligible FSA expenses

The IRS has the final say on which expenses are considered eligible for FSA reimbursement. Here’s a partial alphabetical sampling of eligible expenses:

  • Acupuncture
  • Birth control pills
  • Body scan
  • Braille books and magazines
  • Breast reconstruction surgery
  • Chiropractor
  • Contact lenses
  • Co-pays
  • Crutches
  • Deductibles
  • Dental treatment
  • Eye exam
  • Eyeglasses
  • Eye surgery
  • Fertility enhancement
  • Guide dog
  • Hearing aids
  • Lab fees
  • Long-term care
  • Nursing home expenses
  • Prescription medications*
  • Pregnancy test kits
  • Psychiatric care
  • Stop-smoking programs
  • Vasectomy
  • Wheelchair

* Reimbursements for insulin are allowed without a prescription, according to Healthcare.gov.

Meanwhile, the following expenses are ineligible for health care FSAs* per the IRS rules:

  • Baby sitting, childcare and nursing services for a normal, healthy baby
  • Cosmetic surgery
  • Diapers
  • Electrolysis
  • Funeral expenses
  • Hair transplant
  • Health club dues
  • Maternity clothes
  • Nonprescription drugs
  • Nutritional supplements
  • Teeth whitening

* Note that baby sitting, child care, et al. would be eligible expenses for a dependent care FSA, of course.

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When in doubt, you can always check Publication 502 Medical and Dental Expenses on the IRS website for the latest word on what’s eligible and what’s not.

Final thought

Hopefully you now know the answer to the question, “What is a flexible spending account?”

In the final summation, an FSA is a great way to reduce your taxable income and pay for medical/dependent care expenses that insurance doesn’t normally cover.

Just be careful not to overdo it. You want to be sure the money you’re putting aside won’t just fall to the wayside in your life.

“My advice with FSAs is to choose wisely how much you put in,” Clark says. “You don’t want to overestimate and wind up losing out on your money.”

More health insurance stories on Clark.com

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