Flexible Spending Account Basics
A flexible spending account, or FSA, is a type of tax-advantaged health plan offered by employers. In this article, we will go over the basics of how a flexible spending account works.
Setting Up an FSA
A flexible spending account is only available if your employer offers it. If you have a health plan through your employer and they offer FSAs, you will need to contact the appropriate department at your job to set one up.
You can only use funds in an FSA for specific purposes. This includes medical and dental expenses for yourself, your spouse, or your dependents. Not all medical and dental expenses will qualify. You will want to be familiar with your FSA’s definitions of qualifying expenses. But usually, they include:
- Deductible and co-payments
- Prescription medications
- Crutches, bandages, diagnostic devices (i.e., blood sugar test kits)
- Amounts paid to diagnose, cure, mitigate, treat, or prevent disease, or ailments.
Health insurance premiums, cosmetic procedures, and gym memberships do not qualify as eligible expenses.
When you have qualifying expenses, you will need to submit a claim to your FSA. Your claim will need to be accompanied by proof of your expense and evidence it was not covered by your health insurance plan. Once your employer processes it, you will receive reimbursement through your employer from your FSA.
Before you set up an FSA, there are some additional considerations you should take into account. First, in 2021, the IRS limits you to contributing $2,750 per year, per employer, in your FSA. If you are married, your spouse can contribute up to $2,750 into an FSA with their employer too. Second, you must use FSA funds within the plan year or lose the leftover funds. Due to this, you will want to carefully plan the amount you decide to contribute.
However, your employer may offer options that allow you to extend your coverage. Some employers provide you with a grace period, giving you up to two and a half additional months to spend down your FSA funds. Other employers will allow you to carry over up to $550 of left-over funds to use the following year. It is important to note, it is not a requirement for your employer to offer these, it is in their discretion to do so.
Deciding If an FSA is Right for You
Whether or not a Flexible Spending Account is right for you will depend on your personal circumstances. Have your tax preparer review your current situation to see if an FSA would benefit you.
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