Every year, the IRS reminds eligible employees to take advantage of their employer’s health flexible spending arrangement. Flexible Spending Accounts, or FSA for short, are special accounts where employees can deposit money to pay for their medical expenses that are not covered under other health plans. Interested employees need to decide the amount they want to contribute and inform their employer before the beginning of the next plan year. In this brief post, we will look at 5 commonly asked questions about FSAs and their answers.
1. Are the contributions to the FSA tax-free?
Yes, the amount that goes into these accounts is tax-free. They are not subjected to Social Security tax, Medicare tax or federal income tax. The maximum that an employee may contribute every year to the FSA is $2500. As an employee, you decide on the amount to be deducted toward the contribution.
2. Where can I use FSA funds?
FSA funds can be spent on prescription medications and over-the-counter medicines without a doctor’s prescription. Reimbursements for insulin are also allowed without a prescription. Costs of medical equipment such as diagnostic devices (such as blood sugar test kits), crutches and supplies like bandages are also covered by FSA.
In addition, you may also use FSA funds to pay for certain medical and dental expenses that include copayments, deductibles, coinsurance, drugs, and other allowable health care costs. For a complete list of permitted medical and dental expenses, you can visit the US government’s official healthcare website at www.HealthCare.gov.
3. Can I spend FSA funds on insurance premiums?
No, FSA funds can’t be spent on insurance premiums. The FSA can only be used to pay for qualified medical expenses. The medical costs that qualify are defined by The Internal Revenue Service and are noted in your FSA plan.
4. Can self-employed individuals contribute to FSA?
No, self-employed individuals cannot contribute to FSA, as they are available only with job-based health plans. Only the employees whose employers offer FSA are eligible for contributing to the FSAs. In fact, it is not mandatory for all employers to offer FSA. Employees, therefore, must check with their employers to see if they offer FSA’s.
5. What happens to the unused FSA contributions?
Ideally, the contributions that you make to your FSA should be utilized in the same year for which they are contributed. If you fail to use the funds, they are forfeited, unless your employer provides you any one of the following options:
Under this option, employees can carry over up to $500 of their unused funds to the next plan year. For example, an employee with $400 of unspent funds at the end of the year in 2016 can still have those funds available for use in 2017.
Under this option, employees get a grace period of 2½ months after the end of the plan year to utilize the unused funds. For example, for a plan year ending on Dec. 31, 2015, the grace period is offered till March 15, 2016.
Note – Employers may offer either of the two options, but not both. They may also choose not to offer either.
Flexible spending accounts are a great way to save tax dollars on medical expenses if you use them to their maximum potential. Make sure to check out the guidelines identified in your plan.