What is FSA (Flexible Spending Account)? How does it work? Who can use it?
What is FSA?
An FSA is a pre-tax fund that is arranged through an employer, to set aside money to pay for out-of-pocket expenses. It is an arrangement that allows some employees to contribute a portion of their earnings to pay for medical and dental expenses. In some cases, employers also make contributions to their employees FSA, but this is not always the case.
What is the difference between FSA and HSA?
Because FSAs allow employees to build a fund for healthcare expenses, they are similar to HSAs (Health savings accounts) but they differ in a few key points. The main difference is that, as the name implies, FSAs are more flexible than HSAs and offer more options. For example, an HSA can only be used with a High Deductible Health Plan (HDSP), whereas an FSA can be used with a wide array of health plans, including PPOs and HMOs and more.
What is the Benefit of FSA?
FSAs can be very useful for people who spend a lot on copayments or deductibles, certain prescriptions, insulin, and certain types of medical devices. Because the money that goes into your FSA is not taxed, you can potentially save a lot of money on these expenses by using an FSA. However, the amount that an employee is allowed to contribute to their FSA is capped at $2,750. If your employer contributes to your FSA, this does not change the amount that you are allowed to contribute. If at the end of the year, an employer with an FSA has not spent the money in the account, their employer can give them two options. Either:
- They have 2 and a half months to spend the remaining balance
- Or they can carry over $500 of their current balance to the next year
FSAs can be used for out-of-pocket dental as well as medical expenses, and it can usually be used for expenses for your spouse and dependents as well. FSAs cannot be used to pay for insurance premiums, however.
Who is eligible for an FSA?
Generally, the only requirement for getting an FSA is being the employee of a company that offers FSAs. If you are self-employed, you are not eligible for an FSA. There are usually no health insurance plan requirements to get an FSA, as unlike with an HSA, you can have any health insurance plan (PPO, HMO, etc.) or even no plan and still be eligible for an FSA.
If you are interested in getting an FSA, you should check with your employer if it is offered, and get the next steps from them if it is. Some employees may be eligible for more than one FSA, so it is important to discuss the details of your employer’s FSA offering with them.
How do I withdraw money from my FSA?
When withdrawing money from your FSA, the procedure you have to follow varies depending on what your employer offers. Some employers will give you a debit card that you can use to pay for out-of-pocket medical expenses, and others will require that you pay the expenses upfront and then file for reimbursement. You should check with your employer on the specifics of how your FSA works.
Regardless of how your FSA works, you should be aware of all your medical expenses and keep copies and receipts of any out-of-pocket payments you make. Most FSAs will require you to submit paperwork, so it is a good idea to keep all of that information on hand.
Conclusion: What is FSA, how does it work, how can you start it?
FSAs are a great option for anyone who has significant out-of-pocket medical expenses. They can help you save money by keeping pre-tax funds in an account for you to use when needed. There are limits to FSAs, including a cap of $2,750, limits to what they can be used to pay for, and a timeline in which the money in your FSA needs to be spent, and a limit on how much money you can carry over in the account from year to year.
If you are interested in learning more about FSAs or starting an FSA yourself, you should get in contact with your employer to see if they offer FSAs and the details of their FSA policies if so.