Flexible spending accounts are special savings accounts that let you set aside pre-tax money for paying for child care or for health expenses that aren't covered by your health insurance plan. Flexible spending accounts are offered through many employers, who have the responsibility of opening and maintaining the accounts on behalf of their employees who use them. Flexible spending accounts were started in the 1970's, around the same time that 401K plans began, but as healthcare and childcare costs are increasing, more people are starting to take advance of flex funds.
Money you contribute into flexible spending accounts is done on a pre-tax basis, which helps lower your income taxes, which is a great benefit – but beware of a very big drawback with an FSA: if you contribute more money than you spend on eligible expenses in a year, you lose that money! When opening and determining the amount of your contributions into a flexible spending account, you'll need to take care to plan out the amount you'll likely use and not over-contribute.
Flexible spending funds can be used for more procedures than people tend to realize – if you can show that the expense is necessary for yourself or a dependent, and isn't a cosmetic procedure, you can use flex funds to pay for it (or be reimbursed for the expense). Braces can be paid for with flexible spending account funds.
Will Flex Spending Accounts Save You Money?
Because you contribute money on a pre-tax basis into a flexible spending account, the amount you put into the FSA is deducted from your gross income before taxes. Instead of paying tax on your full gross income amount, you pay taxes based on the gross income MINUS the money you've contributed to your FSA. If you earn $50,000 annually and put $5,000 into the FSA, your gross income is $45,000 instead of $50,000. The money in the FSA will help you pay your medical expenses AND save money on the amount of taxes you owe.
When deciding how much to contribute, you want to take into consideration how much money you typically spend per year for your health care or dependent care – if opening a dependent care FSA. The current contribution limit is $5,000 annually. Remember, if you contribute too much you won't get the money back!
Using a Flex Spending Account
Your employer will have specific information regarding your FSA plan, but the general rules are about the same from one plan to another:
- Using money from the flex fund requires a claim form and receipt that shows the expense, unless you have one of the rare FSA's with a debit card linked to it. Your qualified expenses will be reimbursed out of your flexible spending account, up to the amount you contribute annually.
- If needed, you can use an entire year's contribution early in the year – even before you've contributed the full amount, but you'll have to continue to contribute throughout the year until the full amount has been reached.
- You can use the funds through March of the following year that they're contributed, but any money left in the account after March without a claim will be forfeited.
Flexible Spending Account Uses
Health Care FSA: Covers health related procedures that are not considered cosmetic. You won't be able to get liposuction or hair transplants on an FSA, but infertility treatments or midwives or psychiatry services not covered by your health insurance are considered qualified procedures. Co-pays and fees not covered by insurance can be reimbursed from money in a flexible spending account.
Dependent Care FSA: Covers expenses related to child or adult dependent care while you're at work or working, including day care for children under the age of 13, or older children and adults who are physically or mentally incapable of self-care. Day camps that allow you to work can be paid for with flexible spending accounts.