What Is A Flexible Spending Account?

A Flexible Spending Account (FSA) is a type of tax-deductible, savings program that is often used to offset a variety of health care costs that insurance doesn’t cover. It’s particularly useful for people under the age of 65 who have ongoing medical expenses. Account membership is typically offered as part of one’s employee benefits package, and some employers will even contribute on behalf of their workers.

The Basics

There are several different types of FSAs, but medical ones are the most common. Account holders can generally use these funds to cover medical expenses for themselves and their families. Money placed in these accounts is considered non-taxable income, but participants have currently limited to $2,650 contribution. However, people on high deductible insurance plans who already have Health Savings Accounts (HSA) are only able to get limited FSA coverage.

Although FSA accounts can be used to cover a lot of ordinary medical costs, participants will need a doctor’s note to be able to deduct the cost of participating in some programs and buying nonprescription medicines. This account also won’t cover health club memberships, cosmetic surgery or insurance premiums.

Meanwhile, a dependent care FSA helps offset the costs of caring for young children and elderly relatives for the day so that the policyholder and their spouse can work. The maximum annual contribution for this plan is $5,000 per household. However, funds placed in this account may not be available as quickly as those set in a medical FSA. Other FSA plans may cover the cost of transportation to work or help with adoption fees.

Pros & Cons

As is the case with many tax-deductible programs, participants will need to save related documents (like bills and receipts) so that they can tally up related account costs at the end of the year. This can indeed be a source of frustration for people who aren’t well organized. However, some programs do allow participants to use a debit card to pay for authorized expenses directly.

Perhaps the most troubling aspect of a medical FSA is that any excess funds placed in these accounts can be lost if the end of the year does not use them. Account holders may be allowed to roll over $500 of their unused funds to the next year or take a two and half month extension on their plan, giving them time to spend their money before it disappears. However, only one of these options will be allowed at any given time, and some programs may not offer either.

Who Should Have One

Given these factors, it’s not surprising that some insurance professionals don’t recommend these accounts for young, healthy people. Others point out that money placed into these accounts goes further to cover essential health care costs than it would otherwise, and most healthy adults still go to various doctors’ offices for regular checkups.

Individuals who nonetheless overestimate their spending may not be able to come up with enough deductibles to keep from suffering a monetary loss. Therefore, putting money into an FSA is probably not a wise choice for people that don’t anticipate having extensive medical costs in the upcoming year that aren’t covered by their health insurance. However, it is always smart to speak with a financial advisor before making any final decisions.

Sources:
https://www.nerdwallet.com/blog/health/what-is-flexible-spending-account/
https://www.bcbsm.com/index/health-insurance-help/faqs/plan-types/health-spending-accounts/fsa.html
https://www.healthcare.gov/have-job-based-coverage/flexible-spending-accounts/
https://en.wikipedia.org/wiki/Flexible_spending_account

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