Flexible Spending Accounts (FSA) are savings accounts in which you can set aside pre-tax money to use for qualified medical expenses. An FSA can provide significant tax savings for individuals and families who are paying out-of-pocket for medical expenses, and the money can be used to cover costs not typically covered by health insurance.
FSAs come in two forms: health care Flexible Spending Accounts (HCFSA) and dependent care Flexible Spending Accounts (DCFSA). Here, we will take a look at the benefits of a health care Flexible Spending Account, or HCFSA.
The biggest benefit of an FSA is the tax savings it provides. Money contributed to an FSA is taken out of your gross pay before taxes are calculated, which can reduce the amount of income tax you owe. With an HCFSA, in most cases you can contribute up to $2,650 per year on a pre-tax basis.
Since this money is taken from your gross pay, you don't have to pay federal or state income tax on it, or pay Social Security or Medicare taxes on it. The money does not count toward your total taxable income, so it lowers your adjusted gross income (AGI). When you spend the money in your FSA, you also don't have to pay taxes on it.
Ease of Use
An HCFSA is typically paired with a debit card, so you can use it just like a regular credit card to pay for medical expenses. You can also use the money to pay for out-of-pocket costs like deductibles, co-pays, and prescription drugs.
If you use a debit card to pay for medical expenses, you don't have to worry about tracking specific expenses. The plan administrator can also help you keep track of your spending to make sure you don't go over the annual limit.
In addition to medical expenses, an HCFSA can also be used to pay for dental and vision expenses. The money can be used to cover things like eyeglasses, contact lenses, or dental work—all of which are often not covered by traditional health insurance plans.
An HCFSA can also be used to pay for expenses not typically covered by health insurance, including over-the-counter medications, vitamins, and supplements. This can also be true for other medical expenses, such as health club memberships or medical alert systems.
When you use an HCFSA, you can be sure that your medical expenses will be covered. Many health plans have an annual deductible which can be a large out-of-pocket expense. Since the money in an HCFSA is pre-tax, it can help offset this deductible and other out-of-pocket costs.
An HCFSA can also help if you have a high-deductible health plan (HDHP). An HDHP has a higher-than-normal deductible which you must pay before the plan begins to cover expenses. The money in an HCFSA can help reduce the amount of out-of-pocket expenses you must pay in this case.
No Tighth Olds
Unlike other types of savings accounts, an HCFSA does not have a “use it or lose it” rule. If you don’t use all of the money contributed to your HCFSA by the end of the year, you can carry it over to the next year. In some cases, you can even roll unused funds over to the following year.
Unused Money At the End of the Plan Year
At the end of the plan year, you must either use the remaining funds in your HCFSA or forfeit them. You generally have 60 days after the plan year ends to file a claim on expenses incurred during the year. After the 60-day period, any unused funds will be forfeited.
The Bottom Line
A Health Care Flexible Spending Account (HCFSA) can be a great way to save on taxes and get more coverage for qualified medical expenses. They can help you reduce the amount of out-of-pocket expenses you must pay, and provide coverage for things not typically covered by traditional health insurance plans. An HCFSA also does not have a “use it or lose it” rule, so any unused funds can be carried over to the next year.