Flexible Spending Accounts (FSA): A Comprehensive Guide

Medical benefits are some of the most important benefits that employees receive. They are essential in attracting employees and can be a life-saving benefit for workers or their covered family members. Employers can offer medical benefits beyond standard health insurance, such as flexible spending accounts recognized by the Internal Revenue Service (IRS).

What is a Flexible Spending Account?

A Flexible Spending Account (FSA) is a pre-tax benefit provided by employers that enables employees to use tax-free dollars when paying for qualified healthcare expenses.

How Does It Work?

Either employer or employee may contribute to an FSA’s funds. When employees contribute, they can pay for eligible expenses with pretax income. Alternatively, when employers contribute, employees receive the same tax benefits and often view the contributions as a significant additional benefit to assist with healthcare expenses.

The contributions made to an FSA, whether by employee or employer, generally must be used within the year.

Benefits of Having an FSA

An FSA offers significant benefits to individuals by allowing them to set aside pre-tax money for qualified medical expenses, resulting in reduced taxable income. This tax advantage translates into potential savings on healthcare costs, including medical bills, prescription medications, eligible products, and over-the-counter drugs. Additionally, FSAs provide the flexibility to use allocated funds for various healthcare needs, fostering better financial planning and management of out-of-pocket medical expenditures.

Eligible Expenses and Contributions

FSAs are designed for a wide range of healthcare-related expenses, often exceeding what standard medical insurance health plans cover. The following are various examples of FSA eligible expenses:

  • Copays, deductibles, and coinsurance (but not premiums)
  • Dental care, including cleanings, fillings, root canals and braces
  • Vision care, including eye exams, glasses, contacts, and prescription sunglasses
  • Over-the-counter medications, first aid kits, bandages
  • Feminine care products, birth control pills
  • Therapy, including telemedicine, individual, group, and specialized therapy
  • Crutches, ankle, knee and back braces, arm slings, and kinesthetic tape
  • Acupressure, acupuncture, and acupressure mats

It’s important to note that the Internal Revenue Service sets annual limits on how much you can contribute to a FSA. For 2024, the maximum contribution limit for an FSA is $3,200. This limit is subject to change each year, so it’s crucial to stay updated with the latest IRS guidelines. These contributions must primarily be used for medical care provided in the same calendar year they’re made. However, there’s a 2.5-month grace period after the new year.

Understanding these limits is essential because it determines how much you can save for yearly healthcare expenses.

Managing and Accessing Funds

Managing a healthcare FSA is a straightforward process for both employers and employees. Generally, employers make FSA contributions on the first of the year. Employees can make them all at once or spread contributions across their paychecks.

Employees can pay for medical expenses out of their pocket and later submit them for reimbursement. Some FSAs also provide debit cards that employees can use to make payments. To maintain confidentiality, most employers hire a third-party administrator to manage reimbursements. Employees are responsible for ensuring their funds are utilized within the calendar year, generally for medical care provided within the same year.

Tax Advantages and Savings

A medical flexible spending account offers a key advantage in terms of taxes. The contributions made towards it are deducted pre-tax, which reduces the employee’s taxable income. This results in significant tax savings, depending on the contribution amount and the employee’s tax bracket.

Compared to other healthcare savings options like Health Savings Accounts (HSAs), FSAs are more immediately accessible but have stricter rules regarding eligibility and carryover.

Tips for Maximizing FSA Benefits

To make the most of their FSA benefits, employees should plan for their qualifying healthcare expenses. These expenses typically include routine healthcare needs such as dental cleanings, vision care, acupuncture, and therapy sessions. Employees should be aware of any annual specialist visit copays they might have to pay and budget accordingly for these expenses.

Employers should inform employees that most out-of-pocket expenses for injuries are eligible so that employees are more likely to purchase any devices (e.g., wraps or braces) not covered by insurance.

Finally, employees should wait until the end of the year for any medical expenses that are not entirely necessary. Expenses such as sunscreen, ancestry DNA tests (which are eligible), heating pads, and qualifying skincare products can be postponed if there are more significant expenses due to injury or illness. Employees may use any remaining funds after the first year for such expenses if a grace period is given.

Of course, employers can inform employees of their remaining health flexible spending account benefits and should notify them sometime in November or December.

Employer-specific FSA Policies

FSA offerings can vary significantly from one employer to another. For instance, employers have the authority to decide whether to allow a grace period or carryover allowance. The exact process for reimbursement, including whether a debit card is provided or not, depends on the employer and administrator.

To avoid miscommunication, employers should work with a knowledgeable FSA administrator when setting up an FSA benefit. A knowledgeable administrator can walk employers through various options and help them determine the best way to structure their FSAs, along with other benefits.

Common Misconceptions and FAQs

Flexible spending accounts are not the same as health savings accounts, which is the biggest misconception. Unlike HSAs, FSAs can’t be rolled over year after year.

Can FSAs be used to pay insurance premiums?

No, FSAs cannot be used to pay for health insurance premiums. Still, they can cover many out-of-pocket medical expenses.

What’s a letter of medical necessity?

A qualified medical professional provides a letter of medical necessity (LMN). If something is deemed medically necessary, it may be eligible for reimbursement through an FSA. Air conditioners, air purifiers, doulas, and other expenses are only covered if an employee has an LMN.

What happens to unused FSA funds?

Any unused FSA funds are forfeited after the rollover and grace period.

What’s the difference between Health Care FSA and Dependent Care FSA?

A Health Care Flexible Spending Account (FSA) is for medical expenses, including doctor visits and prescriptions, for you and your eligible dependents. In contrast, a Dependent Care FSA is related to the care of dependents under a certain age, typically children under 13 or disabled adults who require care. Dependent Care expenses include daycare services, preschool tuition, before and after-school care, and in-home caregiver expenses. Both FSAs allow pre-tax contributions, but Health Care FSAs may offer rollover options, while Dependent Care FSAs typically do not.

Take Advantage of FSA Benefits

Flexible Spending Accounts are an excellent way for employees to save money on healthcare costs. The immediate tax-saving benefits and the ability to cover a wide range of expenses make this benefit highly desirable for every employee.

If you’re interested in providing your employees with FSAs, we invite you to get in touch with us at Progressive Benefit Solutions. We’ll be happy to provide you with more information and answer any questions you may have.