Financial employee benefits like insurance, 401k matching, and stipends are powerful incentives that can make a big difference in your budget. But if you’re not familiar with their ins and outs, you could miss out on their benefits.
A flexible spending account (FSA) is a type of employee benefit that can make healthcare costs more manageable, giving you the money you need to pay for medications or checkups. Learning what you can spend FSA money on is vital to maximizing its potential and capitalizing on your savings opportunities.
It’s okay if you have no idea how employee benefits work, which purchases are eligible, or which expenses will come out of your own pocket. Here’s a guide to understanding the basics of an FSA to help you make the best spending choices this year.
What is an FSA?
An FSA, or Health Care FSA (HCFSA), is an employer-sponsored bank account that allows full-time and part-time workers to set aside pre-tax dollars for eligible healthcare expenses, according to the United States government’s website, HeathCare.gov. As an employee, you can add money to this account, and your employer might also make its own contributions. Employers aren’t required to contribute.
Either way, the money in an FSA is exempt from payroll taxes, which means it’s part of your non-taxable income. If your employer gave you $1,000 through this account, for example, you wouldn’t have to pay taxes on that income. According to the FSAFEDS website, this results in an average tax saving of 30% on eligible healthcare expenses.
It's important to note that you can’t use HCFSA funds for health insurance premiums. You can use it for deductibles and copayments, but the point of the account is to offer extra spending money to lower the overall out-of-pocket cost of healthcare.
How an FSA works
An FSA account allows employees and employers to contribute pre-tax dollars into an account designated for health-related expenses. According to HealthCare.gov, your contributions come directly out of your paycheck. You can decide how much to contribute to the FSA within the limits set by the IRS or your employer, and the money you accumulate can pay for FSA-eligible items.
Similar to insurance, you’ll pay for a medical service and then submit a claim for reimbursement — but instead of an insurance plan, that reimbursement money will come from the FSA. You might also receive an FSA-specific debit card to access your funds, in which case, the item approval process is mostly automatic.
You do have to use the funds within the plan year or a specified grace period, if your employer provides one. Some plans also allow a carry-over of a portion of the funds to the following year, but in general, you shouldn’t deposit more than you think you can or will spend.
3 FSA facts you should know
Understanding the nuances of your FSA can help you use it to your advantage and make the most out of your benefits as an employee. And when spending FSA money, it's important to plan ahead so your choices align with IRS guidelines and your financial needs.
According to HealthCare.gov, this is what you need to know to confidently navigate your FSA:
1. Limits on contributions: The IRS has annual contribution limits to FSAs to maintain the program's integrity and tax-advantaged status. The goal of this cap is to cover out-of-pocket medical expenses without becoming a tax evasion loophole. For the plan year 2024, you’re allowed to contribute up to $3,200, an increase from $3,050 in 2023. This includes both your contributions and your employer’s.
2. Navigating grace periods: One of the most crucial features of an FSA is the grace period, which keeps you from losing any funds you didn’t spend during the year. After the close of the plan year, this period extends your spending capabilities for up to 2.5 months. So if your plan year ends on December 31, 2024, you have until March 15, 2025, to use your 2024 FSA dollars on eligible expenses.
3. Carry-over options: Some FSA plans permit you to roll over a portion of your funds, up to $610, to the following year. This carry-over can alleviate the pressure of the “use it or lose it” policy, giving you a head start on next year’s FSA healthcare expenses. Whether it’s stocking up on first aid kits from the FSA store or planning for dependent care, these carry-over funds can ensure your healthcare needs continue seamlessly into the new plan year.
Keep in mind that when your employer offers an FSA, it can have either a grace period or a carry-over amount — not both. Before the end of your plan year, make sure you’re aware of which one applies to you so you can use it accordingly.
What can FSA be used for? 8 eligible items
HCFSAs offer a tax-savvy way to pay for medical expenses, but it's crucial to use all the funds within the plan year. FSAs operate on a “use it or lose it” basis, meaning unspent money returns to your employer after the plan year ends, excluding any rollovers or grace periods. If you had $1,000 in your FSA and $610 rolled over, the extra $390 would go back to your employer. Employers may use these funds to cover administrative costs, lower the following year's premiums, or distribute them among employees enrolled in the upcoming FSA cycle.
It's important to note that while this list covers a range of eligible expenses, it's always best to check with your specific FSA plan, as items can vary. Here’s a breakdown of typical eligible expenses to ensure you’re fully tapping into your job benefits:
1. Prescription medications
Prescription medications are usually eligible for FSA coverage, and they can be brand-name or generic. This is helpful if your insurance doesn’t cover all of your prescriptions. FSA-covered options might include antibiotics, birth control, and strong painkillers.
2. Over-the-counter medical products
You don't always need a prescription to use FSA dollars. A wide array of OTC products, often including pain relievers and pregnancy tests, are eligible. This also may include everyday items like bandages and first aid kits, which you can stock up on from retailers like Amazon and Target or directly from an FSA store.
3. Medical equipment
When it comes to managing health conditions, the right equipment can make a huge difference in your quality of life. FSA funds usually cover essential medical equipment such as crutches, blood sugar test kits, or even a breast pump. As far as your FSA is concerned, these items are necessities that support your health and well-being, not conveniences.
4. Vision care
Your sight is precious, and FSAs recognize that. Your account often covers vision care essentials like prescription eyeglasses, contact lenses, and cleaning solutions. It may even pay for prescription sunglasses, ensuring your eye protection and health don't fall by the wayside.
5. Dental treatments
Dental health is a crucial part of overall well-being, but many medical insurance plans don’t cover it. An FSA could ease the financial burden of non-cosmetic dental treatments, which may include routine cleanings, fillings, and even orthodontic care.
6. Dermatological products
Skin conditions require specialized care, and FSAs sometimes cover dermatological products prescribed for specific conditions such as acne or eczema. Provided you have a prescription, covered dermatological products could range from medicated creams to moisturizing products, all aimed at managing or treating skin health issues.
7. Diagnostic devices
With the right tools, you can monitor your health from the comfort of your home. FSAs can cover diagnostic devices like blood pressure monitors and thermometers, empowering you to stay on top of your health outside of the doctor’s office.
8. Mental health treatment
Mental health is just as important as physical health, and FSAs recognize that and usually cover various treatments. Mental health benefits may include online therapy, psychiatric care, and related medications. Keep in mind that you may need to provide documentation such as proof of expenses and sometimes a letter of medical necessity for certain therapies.
What can I not use FSA on?
Despite the FSA’s versatility, it doesn’t cover everything. Misunderstanding the scope of eligible expenses can lead you to under-utilize funds or unknowingly purchase ineligible goods or services, so make sure you’re aware before you purchase.
Here’s a guide to what you can’t use FSA funds for, helping you plan around this unique employee benefit without unpleasant surprises at the year's end:
1. Cosmetic procedures
While your FSA is a powerful tool for managing health care costs, it draws the line at cosmetic procedures. Services like cosmetic surgery or teeth whitening are typically ineligible unless they're part of treatment to alleviate or prevent a physical ailment. Reconstructive surgery following an injury is an eligible expense, while elective cosmetic surgery is not.
2. Non-prescribed items
Your FSA is designed to ease the financial load of managing health conditions, not for everyday personal care. Items that fall into daily grooming or self-care, such as toothbrushes or moisturizing creams that aren't medically necessary, won't qualify. If you’re unsure about something, check the official FSA Store’s list to see if it’s eligible.
3. Insurance premiums
The purpose of FSAs is to help with out-of-pocket medical expenses — not insurance premiums. This means you can't use your FSA dollars to pay for the monthly premiums of your health insurance plan. However, copays, deductibles, and other out-of-pocket costs that arise from your health care are eligible for FSA reimbursement.
4. General health
Items or services that fall under the umbrella of general health and employee wellness, such as gym memberships or coaching, are typically not FSA-eligible. However, if such expenses are part of a treatment for a specific medical condition prescribed by a healthcare provider, they may qualify.
Can you take cash out of FSA?
No, you can’t withdraw cash from an FSA. However, this employee benefit includes a debit card option, often referred to as the Flexcard, which allows direct payment for eligible healthcare expenses. This card simplifies the process by automating the IRS approval process, saving you time and energy.
Not all transactions made with the Flexcard are automatically approved. You still have to provide documentation for their expenses, such as receipts from doctors, medical equipment providers, or pharmacists, to verify their eligibility. This means that while the Flexcard offers convenience, you must still comply with IRS rules.
Even if you have a card in your hand, it’s important not to treat an FSA like a savings account. This account’s sole purpose is to cover healthcare costs and nothing else. If you're nearing the plan year's end and have excess funds, consider stocking up on eligible items like first aid kits, pain relievers, or even lip balm with SPF from FSA stores or approved retailers.
The key to unlocking health savings
Your FSA is an invaluable resource for managing healthcare expenses and securing financial wellness. Remember, knowledge is power — and with these insights, you can make the most of your healthcare dollars, keeping both your body and your budget in good shape.
When you’re thinking about what you can spend FSA money on, remember to check official government documentation from the IRS site and HealthCare.gov to make sure you don’t pick up something the account won’t cover. Eligible items extend to a wide range of products and services, including over-the-counter items and dependent care products, but it doesn’t cover everything. It’s always worth it to double-check.
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