If you have a Flexible Spending Account (FSA), December 31 is right around the corner, and time is running out for you to spend that money. FSAs allow you to set aside pre-tax dollars from your paycheck and are a great way to save money for qualified medical, dental, and vision expenses. However, understanding how FSAs work, the drawbacks, and how to maximize your benefit is key to taking full advantage of the savings they offer so you don’t leave money on the table.
What is a Flexible Spending Account?
An FSA is a special account you put money into to pay for out-of-pocket healthcare costs for you, your spouse, and your dependents. It’s a great way to reduce your taxable income and save an average of 30% on medical expenses such as eyeglasses, prescriptions, and over-the-counter items (even menstrual products). It’s similar to a Health Savings Account (HSA) but has a few differences. HSA funds roll over from year to year, and there’s no deadline to spend it all. With an FSA, most of your funds expire at the end of the year.
The U.S Healthcare system is notorious for being a head-scratcher. Every year healthcare costs rise, and even with comprehensive health insurance, you are most likely stuck paying additional expenses like copays or sometimes staggering fees after a procedure. Fortunately, an FSA can help ease that burden and make out-of-pocket healthcare expenses more affordable.
What are the Benefits of an FSA?
An FSA isn’t going to lower the actual costs of your healthcare expenses. Still, it will cover items not covered by insurance, like the flu shot, diagnostic tests, or those trendy Warby Parker glasses. The real benefit of an FSA is spending money that’s tax-free, meaning saving you money in the long run and having money set aside for when you and your family need it most.
Tax Savings Opportunities
Let’s say your salary is $50,000, and you contribute $2,000 to an FSA account. You will only pay taxes on $48,000 of earnings saving you approximately $600. That means you get $2,000 worth of purchasing power plus pay about $600 less in Federal taxes. These tax-free funds can help pay for products you would usually pay out-of-pocket.
Family is Covered
FSA benefits apply to everyone in your family, including any adult children to the age of 26 who generate healthcare expenses and are claimed on your tax returns. Bonus, if you’re married, your spouse can put the max contributions in an FSA with their employer. This is an easy way to make the money you earn go further.
FSA Eligible Expenses
So, what makes a product or service eligible? That comes from the Internal Revenue Service’s (IRS) Tax Code 213(d) defines “medical expenses” as “costs of diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body.” Here are some products that fall into that definition:
- Birth Control
- Cold and Flu Medicine
- Diagnostic Products
- Breast pumps
- Reading glasses
- High SPF Sunscreen
- Prenatal Vitamins
- Over-the-counter medicines
- Prescription medicines
- First aid supplies
- Acne treatments
- Feminine care
- Contact lens
- Children’s health products
- Copays and specialist visits
With 4,000+ eligible products and services, it is hard to list everything here. Luckily, several stores like Amazon, CVS, and Target categorize FSA products, so you don’t have to second guess. Depending on your employer and health plan, most accounts provide an online portal making it easier for you to manage, and some offer FSA debit cards, so all you have to do is swipe to purchase.
Drawbacks of an FSA
There’s always a catch when it comes to saving money. If you choose to opt into an FSA, be prepared for the drawbacks and things to keep in mind when deciding if an FSA is right for you.
Use It or Lose It
FSAs are commonly referred to as a ‘savings account,’ and while that’s a comforting thought, your ‘savings account’ belongs to your employer, and the money disappears at the end of the year if you don’t use it. Even though the FSA is yours, you won’t be able to keep it if you leave your job and the money you have in the account goes back to your employer to offset the cost of administering benefits. Depending on your employer and the health plan, there may be a grace period to use the funds before March 15. Another option is employers can offer up to $570 to be rolled over into the following year’s plan. It’s not mandatory, and employers can only offer one, not both, options.
For 2022, FSA contributions are limited to $2,850 for the entire year per employer and cannot add more than that to the account. If you need to save more than the limit, you’ll need to look at other options. The contribution you put in the employee paperwork during enrollment cannot be changed until the next open enrollment period or meet a qualifying life event.
For 2023, you can contribute up to $3050, up from $2850 in 2022. To take full advantage of this benefit, think about and list all anticipated healthcare expenses – including your spouse and any dependents. This will help you know how much you need to contribute to the FSA. Remember, if you contribute $2,500 but only spend $2,000, the remaining $500 goes back to your employer. It may be helpful to research your employer’s health plan to see if the reimbursement process is complicated because you may have to submit paper receipts to the benefits coordinator. Planning ahead and considering your and your family’s needs means you’ll get the most from an FSA.
Does your FSA Expire at the End of the Year?
With the end of the year just days away, now is the time to buy health-related products to start 2023 off on the right foot. Healthyr has five FSA-eligible home blood tests that fall under the IRS definition of a ‘medical expense.’ Before purchasing, we recommend checking with your FSA administrator to confirm that Healthyr’s tests are covered.