What is a Flexible Spending Account (FSA)?
An FSA, is an account into which employees can allocate pre-tax money throughout the year to pay for certain out-of-pocket health care costs
Employees can use FSA funds to pay for certain out-of-pocket health care costs.
An employee elects how much money they want to allocate, then the money is deducted from that employee’s paycheck over the duration of the year. Because it is pre-tax income, there can be significant savings when using FSA funds over your checking account. FSA’s can be used in conjunction with most types of Health Insurance Plans and in 2021, the annual limit is $2,750.
Common features of an FSA:
- Funds can be used for deductibles, copays, medication, and other health care related out-of-pocket costs.
- The employer owns the account — if you leave the company, you can’t take the account with you.
- All money deposited is untaxed.
- For ease of use, most FSA accounts come with a debit card
- Employees can spend the money in the account before it’s fully funded.
How Does an FSA Work?
Healthcare FSAs can cover medical, dental or vision expenses that you would otherwise pay for out-of-pocket, including co-pays and deductibles. Health insurance premiums are not eligible expenses. For a full list of qualified expenses please visit IRS Publication 502. This now included The Liner Wand!
Can a Healthcare FSA Cover Expenses by Dependents?
Yes, a Healthcare FSA can cover expenses for qualifying dependents, even if they are not currently covered under your employer-sponsored health insurance plan. Qualifying dependents include:
- Qualifying child
- Qualifying relative
How Does a Dependent Care FSA Work?
A Dependent Care FSA can reimburse you for the work-related cost of care for a qualifying dependent. For a full list of qualified expenses please visit IRS Publication 503.
A qualifying dependent is broadly defined as:
- A tax dependent of yours who is under age 13, or
- Any other tax dependent of yours, such as an elderly parent, who is physically or mentally incapable of self-care and has the same principal residence as you
- A spouse who is physically or mentally incapable of self-care and has the same principal residence as you
To qualify for a Dependent Care FSA, one must be “gainfully employed”. Gainful employment usually means working or looking for work. If an employee is single, they may be reimbursed for expenses incurred due to gainful employment. If they are married, generally both the employee and the spouse must be gainfully employed or looking for work to be reimbursed for expenses.
For 2021, employees may contribute up to $5,000 per year to a DCFSA if they are married and filing a joint return, head of household, or if they are a single parent. If an employee is married and filing separately, they may contribute up to $2,500 per year per parent.
If you want to learn more about FSA plans there are a wealth of great resources available online including this one at healthcare.gov.