If you’re starting a new job, you’ll want to look closely at the suite of benefits and other perks your employer offers to its workers. There’s one benefit in particular that you shouldn’t ignore: the flexible spending account, or FSA. It complements your employer-sponsored health care coverage and provides a nice tax deduction.
What Is a Flexible Spending Account (FSA), and How Does It Work?
An FSA is a health savings program that you can tap to pay for certain out-of-pocket medical and dental expenses such as copayments, coinsurance, and deductibles. If you’re married, it covers costs incurred by your spouse or kids, as well.
You can contribute up to $2,750 a year to an FSA as of 2020, and you don’t have to pay taxes on that money. It’s essentially free money from Uncle Sam. To sweeten the pot, if your spouse has a job, he or she may also be able to open an FSA, too. You really can’t beat eliminating $5,500 from your family’s taxable income!
What Other Costs and Expenses Does It Cover?
Certain prescription and over-the-counter medications qualify for FSAs. Also covered? Medical equipment like crutches and eyeglasses (frames and lens), medical supplies like bandages and tape, and diagnostic devices like blood sugar test kits and blood pressure monitors.
In fact, FSAs can pay for hundreds of things.
Check out the FSA Store to get a better picture of eligible products and services. Bear in mind, though, that you can’t use your FSA to pay for health insurance premiums.
How to Set Up a Flexible Spending Account
Employers are expected to inform new and current employees about FSAs and other offered benefits.
When you go to open an account through your employer, you’ll need to decide how much money to contribute, typically biweekly. For example, let’s say you go with the $2,750 max. About $106 would be deducted from your paycheck over 26 pay periods.
Another reward? You can spend the full $2,750 immediately after opening your FSA, even though you’re just starting to fund the account.
If you're a new employee, you have 30 days from your start date to open an account.
If you're a current employee who doesn’t have an FSA, you have two options to get one. You can either sign up during an open enrollment period — typically held in November — or when you’re experiencing a “life change,” such as having a baby or getting married.
Who Runs Your FSA?
A third-party vendor will handle your FSA — the bookkeeping, payment of claims, and so on.
In my experience over the years, dealing with an FSA vendor is easy and efficient.
You can submit your claims online at any time for reimbursement. Once you're approved, the vendor will transfer the money to your bank account or cut you a check. Just don’t forget to preserve all of your receipts and other forms so you can file a hassle-free claim to get speedy reimbursement.
That said, most vendors will issue a debit card linked to the FSA, which eliminates the need to file reimbursement claims.
How Long Can You Hold Your Money?
You must spend the money you’ve set aside in an FSA within the plan year, but most employers offer a grace period (lasting a couple of extra months) to use the funds.
Some companies will allow you to carry over a portion of the money to the following year. But remember, at the end of the plan year or the grace period, you will lose any money that remains in the FSA.
This use-it-or-lose-it policy does have its critics, and I’ve known a few people who won’t consider putting money in an FSA as a result. However, I’ve never lost any money. If time is running out, I’ll spend the balance on a pair of new glasses.
Why You Should Open an FSA
Most of us will get hit with out-of-pocket dental and medical expenses this year, so why not prepare for the inevitable while saving money on your taxes?
Plus, if you have young children, an FSA is a must. I can tell you from personal experience that my FSA came in handy when my wife and I were hit with $1,500 of deductibles one month after my first son was born. And then there were all those $20 copays for monthly doctor appointments!