Medical costs are constantly on the rise, and it's always smart to look for ways to save on healthcare expenses. One employee benefit that millions of workers get from their employers is the ability to contribute to a flexible spending account. Also known as flex accounts, FSAs allow you to have pre-tax money withheld from your paycheck for later use on healthcare or dependent care expenses.
Every year, the amounts that you're allowed to put in an FSA change slightly. Below, you'll get more details about the exact changes to FSAs for 2019 and why it makes sense to take advantage of a flex account if your employer offers one.
Here's what's changing with FSAs in 2019
The most important 2019 change for flexible spending accounts has to do with the amount that you're allowed to contribute to an FSA to cover healthcare costs. That limit rises each year with inflation, and because of the changes in the Consumer Price Index during 2018, the contribution limit for healthcare FSAs in 2019 will rise by $50. That brings the contribution limit to $2,700.
However, the contribution limits for FSAs for dependent care costs remain the same. Most taxpayers have a $5,000 annual limit for such contributions, but if you're married and file separate returns from your spouse, then a lower $2,500 contribution limit applies.
There's also a further limit on dependent care FSA contributions that married couples need to be aware of. If only one spouse earns income from a job or in self-employed business activity, then no FSA contribution for dependent care is allowed. Also, if the lower-earning spouse makes less than $5,000, then the limit is reduced accordingly to whatever the amount of earnings was. Moreover, if both spouses work and have separate access to an FSA for dependent care expenses, they can't both save $5,000 -- rather, they have to decide how to split the $5,000 overall maximum for the couple.
Are FSAs smart?
The key advantage of using flexible spending accounts is that you effectively save taxes on money that you intend to spend on healthcare or dependent care expenses anyway. Because the money is taken out on a pre-tax basis, you'll pay less in income taxes overall. The higher your income tax bracket is, the more in tax savings those pre-tax contributions will give you. An extra perk is that FSA contributions also avoid payroll tax for Social Security or Medicare, saving most taxpayers another 7.65% of the amount they put into a flex account.
The primary reason why more people don't use FSAs is that they involve a big potential catch: If you don't use all of your flex account money, then you risk losing it. For instance, if you set aside the maximum toward a healthcare FSA but then it turned out that you were healthy and had no medical expenses, you can't get your FSA money back.
However, employers can put provisions into their FSAs that can cushion the potential blow from forfeiture. Many FSAs give you an additional grace period that gives you more than two extra months into the new year to use the previous year's flex money. Alternatively, other FSAs can include a provision that lets you carry forward as much as $500 from a previous year to go toward the new year's healthcare expenses. However, there's no requirement for employers to offer either of these provisions, so you'll need to reach out to your HR department in order to get the answer that applies to you.
Look into FSAs
Even with some potential downsides, FSAs are a great tool to help you save on taxes, especially if your health and dependent care situation is such that you know with certainty that you'll have to pay at least as much as you contribute. If you're not participating in a flex account now, check with your employer and see what you need to do to start using your FSA today.