It's time to pick your employee benefits for the new year. Is a Flexible Spending Account (FSA) one of your options? Before you pass on this optional benefit, learn more about it and decide if it's a smart choice for your situation.
An FSA is an optional part of many employer benefits packages that lets you set aside pre-tax dollars to pay for specific qualifying expenses. While most qualifying items are medical-related, some plans also allow dependent-care expenses for children or eligible adult dependents.
Primary benefits
- Tax savings: contributions are made before income taxes are calculated, reducing taxable income.
- Budgeting: money is reserved for predictable expenses such as copays, deductibles, eyeglasses, and approved dependent care.
Disadvantages
Most FSAs are "use it or lose it," meaning funds not spent within the plan's run-out or grace period may be forfeited. That makes careful annual planning important to avoid losing unused contributions.
Is an FSA right for you?
An FSA can be a good choice if you expect out-of-pocket medical costs your insurance won't cover, such as high deductibles, frequent copays, or planned dental and vision expenses.
You can typically use FSA funds for prescription and many over-the-counter medications, dental work, prescription sunglasses, and some preventive treatments like smoking cessation aids. FSAs generally will not cover cosmetic procedures, routine health insurance premiums, most long-term care or nursing home costs, or recreational programs like summer camps.
For a broader look at employer-sponsored accounts and how they interact, see Workplace Retirement Plans, FSAs and HSAs Overview.
Now that you know more, could you benefit from an FSA this year? Talk to your insurance agent for details about the options your employer offers and to estimate a contribution amount that fits your expected expenses.
Frequently Asked Questions
Can I use FSA money for over-the-counter medication?
Many FSAs allow reimbursement for over-the-counter medications when they meet plan requirements, but rules vary by employer plan.
What happens to unused FSA funds at the end of the plan year?
Some plans offer a short grace period or a small carryover amount, but many follow a use-it-or-lose-it rule; check your employer's specific plan provisions.
Can I change my FSA contribution during the year?
Changes are typically allowed only after a qualifying life event, such as marriage or birth of a child; otherwise changes usually occur during open enrollment.
Are dependent care expenses handled the same as medical FSAs?
Dependent care FSAs cover eligible child or adult dependent care costs under different rules than medical FSAs, so review the separate plan details.