How a Flexible Spending Account (FSA) Works

Flexible spending account

Health insurance coverage provided by your employer comes with an option not available to individual policies: a Flexible Spending Account (FSA). While it’s not an arrangement that makes sense for everyone, under the right circumstances having an FSA is a good choice.

A Flexible Spending Account is an account into which you put money that you then use to for pay most, but not all, out-of-pocket health care costs over a course of a year.

The upside – You don’t have to pay taxes on money you put into an FSA.

The downside – If you don’t use all the money you’ve put into an FSA you forfeit it at the end of the year.

What FSA Funds Will Pay For?

Money you put into an FSA can be used to pay for medical, dental and vision care expenses for you and anyone insured on your plan. These include:

  • Insurance deductibles and copayments
  • Prescription medications, including birth control, and over-the-counter medicines with a prescription from your doctor.
  • Insulin, even without a prescription
  • Medical equipment, such as crutches, walkers, and breast pumps, as well as bandages and other supplies
  • Acupuncture and chiropractic treatments
  • Psychological treatment
  • Smoking cessation programs

You’ll find a more comprehensive list on the IRS website.

What an FSA Won’t Pay For?

  • Insurance premiums
  • Over-the-counter medications without a doctor’s prescription
  • Vitamins
  • Cosmetic surgery and procedures

The Rules

An FSA is limited to $2,500 per year (as of 2016). When you enroll, you determine how much you want to put into the account; you’re not allowed to change the amount of money committed at any time. Your employer can, but is not required to, contribute to your FSA account.

Although you must use the money in your FSA or lose it. To get around this, your employer may offer you one of two options:

  • Receive grace period of up to two-and-a-half months to use up your FSA account funds.
  • Carry over as much a $500 to use in the next year.

Is an FSA account a good idea for you? It can help save on taxes, but you can lose money if there is any money left in the account at the end of the year. Get to know your company’s health plan to see what your expenses might be and try to predict how much money you will need. If you generally expect a lot of health expenses, an FSA could be a good way to go. If you’re healthy and rarely go the see a doctor, you might want to forgo an FSA.


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