Healthcare costs are a big drain on many people's budgets, and any break you can find is worth pursuing. Many employers offer flexible spending accounts to their workers, and using an FSA can give you a big reduction in your taxes. However, if you want to make the most of your FSA, you need to keep up to date with the ever-changing rules that govern them. Below, you'll find the basics on flexible spending accounts for healthcare expenses and what's new this year.
Why FSAs are worth a closer look
A flexible spending account is essentially a short-term savings account that you can put part of your paychecks into throughout the year. You decide how much to put into the FSA up to a certain limit each year, and then you can either have payments for eligible medical expenses taken directly from the account, or reimburse yourself for money you've already paid for such expenses.
The biggest reason FSAs for healthcare are so valuable is that they give you one of the biggest tax breaks available. You contribute pre-tax money into the flexible spending account, saving yourself the income taxes that would otherwise get withheld from that amount on your paycheck. Even when you take the money out of the account to use it for medical purposes, you don't have to pay any tax. In addition, you also avoid having to pay the payroll tax for Social Security and Medicare on the contributed amount, which saves another 7.65% for most workers. That extra benefit is extremely rare even for other popular tax breaks like IRA and 401(k) retirement contributions.
It's important to distinguish healthcare FSAs from child and dependent care FSAs. The rules governing that second set of flexible spending accounts are different, as are some of the tax benefits.
Contribution limits for FSAs
As valuable as FSAs can be, there are limits to how much money you can put in them. The limit for 2018 is $2,650, which is $50 higher than it was last year. If your employer wants, it can make supplemental contributions to your FSA that aren't subject to the limit, but that's relatively rare.
What healthcare expenses are eligible?
The range of medical expenses for which you can use FSA money is broad. Copays for regular doctor visits, deductibles and coinsurance amounts for emergency room or hospital stays, and the costs you bear for just about any inpatient or outpatient procedure that's medically necessary will be eligible for FSA treatment. However, health insurance premiums aren't eligible for using FSA money, so you'll have to find other sources of money to pay them.
Those who have prescriptions can also use FSA money to pay for those expenses. That includes not only prescription drug costs but also things like crutches or other medical equipment or devices that are medically necessary. Over-the-counter medications used to be covered, but law changes in past years took away the ability to use FSA funds for them.
The big downside of FSAs
The benefits of flexible spending accounts come with a big trade-off: If you don't use all of the money that you set aside by the end of the year, then you typically have to forfeit it. But that isn't always as bad as it sounds. As long as you incurred the healthcare expense by Dec. 31, most plans will let you take withdrawals early in the following year, when the bill comes due.
In addition, FSAs can offer more extensive exceptions. Plans can give participants until mid-March to use up prior-year FSA money before forfeiting it. Alternatively, plans can allow participants to carry forward up to $500 of prior-year FSA money into the following year. Your employer can only pick one of those options, and it doesn't have to pick either one, so you should talk to your HR specialist to see which specific plan provisions apply to you.
Be smart with your FSA
Flexible spending accounts are definitely worth a closer look if your job offers one. The tax savings alone can help you reduce the net cost of what you end up paying for healthcare.