Does your employer offer flexible spending accounts (FSAs)? Do you take advantage of this benefit?
If you answered "yes" to the first question but "no" to the second, you might miss out on hundreds of dollars in savings annually, depending on your income tax bracket.
What Are Flexible Spending Accounts?
Flexible spending accounts (FSAs) allow employees to set aside money from their paychecks pre-tax to cover eligible out-of-pocket medical or dependent care expenses. While the concept may sound complex, the process is straightforward:
- Every pay period, your employer deducts a set amount of money from your paycheck.
- You use that pre-tax money to pay for qualified medical or dependent care expenses not covered by your regular insurance.
For instance, if your doctor recommends a weight-loss program to address a medical condition such as diabetes, you could use FSA funds to pay for it. The benefit is twofold: you save for health-related expenses regularly and reduce your taxable income, resulting in lower federal income taxes.
Example:
If you earn $50,000 annually and allocate $3,000 to an FSA, your taxable income drops to $47,000. Depending on your tax rate, this could save you hundreds of dollars in taxes annually.
FSA Contribution Limits
The Internal Revenue Service (IRS) has increased FSA contribution limits. Employees can now contribute up to $3,300 annually to healthcare FSAs, a $100 increase from the previous limit. Contribution limits for dependent-care FSAs remain at $5,000 per household. These adjustments reflect rising inflation and the growing costs of healthcare and childcare.
Types of FSAs
- Healthcare FSAs: Cover out-of-pocket medical expenses such as co-pays, prescription medications, medical equipment, and even expenses like weight-loss programs if prescribed by a doctor.
- Dependent-Care FSAs: Help cover costs for dependents, including childcare, nannies, or adult daycare for elderly parents under your care.
Creative Uses for FSA Funds
Flexible spending accounts can cover a wide variety of expenses. According to recent reports:
- Accessibility Renovations: Funds are for modifying your home for medical accessibility, such as installing ramps or handrails.
- Medical Travel Costs: You can use FSA money for gasoline, tolls, or parking expenses when traveling for medical appointments.
- Childcare Expenses: Dependent-care FSAs are for daycare, preschool, or summer camps.
As IRS guidelines update annually, check with your plan administrator for a comprehensive list of eligible expenses.
The "Use-It-or-Lose-It" Rule
FSAs are not without drawbacks. The "use-it-or-lose-it" rule requires that you spend all the money in your FSA by the plan year's end, or you risk forfeiting any unspent funds.
Options to Avoid Forfeiting Funds:
- Some plans offer a grace period to use leftover funds until March 15th of the following year.
- Others allow you to roll over up to $610 into the next plan year, an increase from the previous $570 limit.
These provisions are employer-dependent. Employers must choose between offering a grace period or a rollover option, so check with your HR or benefits administrator to understand your company's policy.
FSA Availability
FSAs remain a valuable but underutilized benefit. According to the U.S. Bureau of Labor Statistics:
- 46% of private industry workers have access to FSAs, a slight increase from previous years.
- 72% of state and local government employees have access.
This disparity highlights the importance of advocating for better benefits if your employer does not offer FSAs.
Take Advantage of Your FSA
FSAs can save you significant money on medical and dependent care expenses while reducing your taxable income. However, their effectiveness depends on careful planning:
- Understand your plan's rules regarding grace periods or rollover options.
- Estimate your annual healthcare and dependent care expenses accurately to avoid forfeiting funds.
FSAs are a powerful tool for managing healthcare costs and maximizing tax savings. Make this the year you take full advantage of this underappreciated benefit.