A flexible spending account (FSA) is a type of savings account typically used for healthcare expenses. Many people use an FSA to cover expected healthcare costs throughout the year, saving money on taxes because the funds are put into the FSA tax-free. Using an FSA is dependent on the individual and it isn’t right for everyone. Working with a financial advisor can help you determine how an FSA might fit into your overall financial plan.
What Is a Flexible Spending Account?
An FSA is an employer-sponsored benefit account that can help cover healthcare costs. These accounts allow employees to set aside up to $2,850 of pretax money to cover qualifying healthcare expenses.
FSAs are subject to a use-it-or-lose-it rule, meaning that money in the account doesn’t roll over to the next year, with two exceptions:
- Employers can give employees the option to roll up to $570 to the next year.
- Provide a grace period of 2 ½ months to use money from the previous year.
Employers can opt for either exception but not both. Your employer may also contribute to the account, but that’s not required.
What Expenses Can You Cover With an FSA?
There are many types of expenses you may be able to cover with an FSA, and the government holds an exhaustive list online. Some of the most common, and most relevant, expenses that may be eligible to be paid for using your flexible spending account include:
- Copays and specialist visits
- Certain prescriptions
- Over-the-counter medications
- Home healthcare
- Dental costs
- Vision correction costs
FSA Contribution Limits
For 2022, employees can set aside up to $2,850 in pretax income in their FSA. If your employer contributes to the account, it does not count against your contribution limit for the year.
Like other types of savings accounts, such as the health savings account (HSA), the contribution limits for FSAs often change from one year to the next. For the 2022 tax year, the contribution limit was $2,850.
Special Types of FSAs
There are two special types of FSAs to which you might be able to contribute: a dependent care FSA (DCFSA) and a limited expense health care FSA. Let’s take a look at how each differs.
Dependent Care FSA (DCFSA)
The DCFSA is a pretax benefit account employees can use to pay for eligible dependent care services. This can include both children or an adult such as a spouse who is unable to care for him- or herself. Eligible services include adult or child daycare, babysitting, day camp and medical care.
There are separate contribution limits for DCFSAs. For 2022, the limit is $5,000 per household or $2,500 if married or filing jointly.
Limited Expense Healthcare FSA
The limited expense healthcare FSA is one that can be used to cover out-of-pocket vision and dental care expenses. This account is intended to be used alongside a health savings account (HSA) for additional savings. It can cover expenses like vision exams and LASIK, dental cleanings, X-rays, fillings and crowns.
The contribution for these accounts is the same as the ordinary FSA – $2,850 with a rollover of up to $570.
Pros and Cons of Flexible Spending Accounts
FSAs can be useful in some cases, but they have their share of downsides. The pros and cons of utilizing a flexible spending account are:
- Reduce taxable income: You don’t pay taxes on the money in your FSA, including when you spend the money on eligible health care expenses. Thus, these accounts can reduce your taxable income.
- Covers a variety of expenses: Many expenses are FSA-eligible, including doctor copays and specialist visits, plus deductibles. However, insurance premiums are not eligible.
- Not limited to certain plan participants: If you have ever investigated HSAs, you know they are limited to those who have a high-deductible health plan (HDHP). However, this restriction doesn’t exist for FSAs; they can be offered alongside any other type of employer-sponsored group health plan.
- Use it or lose it: One of the biggest downsides of FSAs is that money in the account doesn’t roll over to the next year. The only exception is your employer might allow you to roll up to $570 to the next tax year or give you a 2 ½ month grace period where you can use money from the previous year.
- Low contribution limit: The limit on FSAs is relatively low, so they may not be ideal if your health care expenses are high. The limit for individuals is $2,850 in 2022; the limit for HSAs, by comparison, is $3,650.
- No investment option: While money in an HSA can be invested in assets like exchange-traded funds (ETFs), FSAs don’t have this option. This, in conjunction with the use-it-or-lose-it rule, means you can’t use an FSA like a tax-advantaged retirement account.
The FSA is an employer-sponsored account that allows employees to set aside up to $2,850 in pretax money. When the money is used for eligible expenses, the expense will be tax-free. However, money in an FSA doesn’t roll over to the next tax year, unless your employer grants you one of two possible exceptions. Thus, you should be aware of how much you need in your FSA so you don’t end up losing money because you did not use that money.
Tips for Saving on Healthcare Expenses
- It can be difficult to know whether you’re putting too much, or too little, into your FSA. A financial advisor can guide you through major financial decisions, like deciding how much to set aside. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- One of the key benefits of the FSA is it allows you to reduce your taxable income. See how much you’ll pay in income tax to see if you should use an FSA to pay less in federal income tax. Get started with SmartAsset’s income tax calculator.
©iStock.com/LaylaBird, ©iStock.com/designer491, ©iStock.com/Prostock-Studio