Flexible Spending Account (FSA)

What Is a Flexible Spending Account (FSA)?

A Flexible Spending Account (FSA) refers to a healthcare benefit sponsored by the employer, which allows the employees to save up to $2,850 in 2022 ($3,050 in 2023) to fund the cost of qualified medical expenses.

An FSA looks like a savings account, but it is used as a cost for qualified health-related expenses. FSA funds are available on an annual plan-year basis and are paid through regular payroll deductions that happen before taxes.

An FSA covers your medical expenses and your spouse's and tax dependents' medical expenses.

How Does an FSA Work?

In understanding how an FSA works, it is vital to know the following concepts:

Funding

The employer sets up the FSA account and determines how much employees can contribute monthly or yearly. Employees can then make payroll deductions to deposit the money into their FSA.

Accessing Funding

The funds in an FSA can be accessed through a debit card linked to the account or by submitting receipts for reimbursement.

Requesting Reimbursement/Substantiating Purchases

You will need to submit receipts for any eligible expenses to get reimbursements from your FSA. You can also use a debit card linked to your account to pay for qualified expenses.

Claims Processing

The claims process for an FSA can vary depending on the plan, but generally, the employee will submit receipts to the FSA administrator for reimbursement. 

The administrator will then review the claims and approve or deny them.

Account Management

The FSA administrator will manage the account and handle all claims. They will also provide customer service and help employees understand their benefits.

Uses of FSA

FSA can be used for a variety of eligible expenses. The following include:

• For qualified health care expenses, doctor’s visits, prescription drugs, dental care, and vision care can be covered by FSA.
• For qualified dependent care expenses, childcare and elder care are also covered by FSA.
• To pay for your specific medical and dental expenses or your spouse if you’re married, and for your dependents, you can use funds in your FSA.
• You can use FSA funds to pay your deductibles and copayments.
• Aside from prescription medications, you can spend FSA funds on over-the-counter medicines with a prescription by the doctor. For the reimbursement of insulin, it is allowed even without a prescription.
• FSA also covers the costs of medical equipment such as crutches, supplies like bandages, and diagnostic devices like blood sugar test kits.

Pros and Cons

There are pros and cons when determining if an FSA is right for you.

Pros

• FSAs can save you money on taxes because the contributions are made pre-tax.
• FSAs can help you pay for unexpected medical expenses.
• FSAs can be used to pay for a variety of healthcare expenses.
• FSAs funds are available to use immediately.
• Many FSAs provide debit cards to the participant.

Cons

• FSAs have a use it or lose it rule, which means any unspent funds are forfeited at the end of the plan year.
• FSAs are only available to some.
• FSAs have limited funding and can run out quickly.
• FSAs are bound to your employment.
• You cannot deduct the medical expenses you pay out of your FSA when you file your taxes.

The Bottom Line

A Flexible Spending Account (FSA) refers to a healthcare benefit sponsored by the employer, which allows the employees to save up to $2,850 in 2022 ($3,050 in 2023) to fund the cost of qualified medical expenses.

An FSA can be a great way to save money on taxes and pay for unexpected medical expenses. However, it is important to consider the pros and cons before deciding if an FSA is right for you.

FAQs

1) What is a Flexible Spending Account (FSA)?

A Flexible Spending Account (FSA) refers to a healthcare benefit sponsored by the employer, allowing employees to save up to $2,850 in 2022 ($3,050 in 2023) to fund qualified medical expenses.

2. How does an FSA work?

The employer sets up the FSA account and determines how much employees can contribute monthly or yearly. The employee can then use the funds to pay for eligible medical expenses. However, submitting receipts for qualified expenses is necessary to get reimbursement from your FSA.

3. What are some uses for FSA?

FSAs can pay for various health care expenses, including doctor's visits, prescription drugs, dental care, vision care, childcare, elder care, and medical equipment costs.

4. What are the pros and cons of an FSA?

Some pros of an FSA include that contributions are made pre-tax, which can save you money on taxes. Additionally, FSAs can be used to pay for unexpected medical expenses. However, one con of an FSA is that it has a use it or lose it rule, which means any unspent funds are forfeited at the end of the plan year.

5. What type of expenses are eligible for reimbursement with an FSA?

An FSA has rules for funding and accessing funds which are legislated by the IRS and charged for health care expenses only. However, as defined in the IRS code, some products and services reach the approved requirements in Section 213 Medical Expenses for health care expenditures.