The information in this article is up to date through tax year 2019 (taxes filed in 2020).
Many companies offer a flexible spending arrangement, more commonly known as an FSA, that its employees can elect to cover their medical costs. While FSAs offer certain tax benefits for those who use them, there are also certain regulations that all users need to be aware of.
What types of FSAs are there?
FSAs typically come in two forms: Health Care and Dependent Care. While both are used to subsidize medical expenses, they do have different limitations on how much can be included and which medical expenses are eligible.
What can I use my FSA for?
With both the Health Care and Dependent Care FSA, the money in the account must be used for approved medical expenses that are not covered by your insurance plan. This includes copayments and health insurance deductibles but does not include insurance premiums.
Health Care FSAs are specifically for medical costs pertaining to that individual or their spouse.
Dependent Care FSAs can be used to pay for a child or disabled family member’s expenses like elder daycare, preschool or after-school programs.
For either FSA option, things like medications, both prescription and over-the-counter, medical equipment like crutches, ambulance fees or eyeglasses are covered. Get a full list of approved medical expenses here.
FSA tax benefits
FSAs are good for any employee because the money deposited into them is deducted before calculating taxes. This means that contributing to an FSA can reduce the amount you pay in taxes because they reduce your taxable income.
FSA contribution limits
There is a limit to how much an employee can contribute to a Health Care FSA each year. The limit in 2018 was $2,650 but has been increased to $2,700 for 2019. If you’re married, your spouse can also contribute the max amount per year through their employer.
The limits for Dependent Care FSAs are fixed and haven’t changed in years. If the employee is married and files a separate tax return from their spouse, the maximum contribution to a Dependent Care FSA is $2,500. If the employee is married and files jointly, or is single and files as head of household, the limit is doubled to $5,000.
Should I get an FSA?
When deciding if you should opt into an FSA, it is important to research and think about what will best fit you and your family’s needs. You should calculate what your anticipated medical expenses will be and how you’ll distribute those funds. If you’re relatively healthy and don’t have a lot of medical costs, contributing a smaller amount to your FSA may be the right route to take. It also might not make sense to have an FSA at all since funds can only be spent on certain medical activities. However, life is unexpected and careful planning goes a long way.
However, one of the catches to having an FSA of either kind is that the funds must be spent or they expire and are lost forever. Typically, any money in the account must be used in that calendar year, although some employers allow a 2.5 month grace period. After that, the account resets and any unused funds are lost.
In some scenarios, employers allow a roll-over of unspent FSA funds from one year to another but that is capped at $500 so if you have more than that, you can lose the remaining funds. Take time to plan out your financial future with an FSA.