An FSA (or flexible spending account) is an employer-sponsored healthcare benefit that allows employees to set aside up to $2,750 annually to cover the cost of qualified medical expenses. It’s a lot like a savings account but used for qualified health-related costs. FSAs work on an annual plan-year basis and are funded through regular payroll deductions on a pre-tax basis.
These funds are subject to a use-it-or-lose-it rule, which means that any funds that are unspent by the end of each plan year are forfeited to the account holder’s employer. That means you lose your remaining money if you miss the deadline for spending it all, so always keep track. But some accounts might have a lifeline as employers have the option of offering one of two deadline extensions: the FSA grace period or the $550 rollover.
Quick overview: The FSA grace period gives account holders up to 2.5 months after the end of their plan year to spend their remaining FSA dollars, while the $550 rollover allows employees to move up to $550 into next year’s account.
But not all plans have them. To be 100% sure about when you need to use your money, ask your HR department to give you more specifics about the plan.
What are the benefits of a flexible spending account?
The key benefit of an FSA is that it withholds a portion of your taxable income, which is deposited tax-free into an account you can use to cover thousands of qualified medical expenses.
These tax-free funds can help you cover thousands of expenses you would usually pay for out-of-pocket. And they aren’t limited to the account holder’s personal medical expenses—you can also cover medical expenses for your spouse and qualifying dependents (children up to age 26 and adult dependents listed on your tax return).
But where FSAs really shine is in their ability to cover thousands of medical products and services.
What can I use my flexible spending account for?
Short answer? A wide (and growing) selection of health and wellness products, ranging from things you probably use every day, to highly specific diagnostic and treatment products. Pain relief products, baby health care essentials, healthy travel must-haves, you name it—if you have a medical need, chances are there’s some way you can benefit from an FSA.
What makes a product or service FSA-eligible?
The term ‘medical care’ means amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body. With 4,000+ eligible products, there’s obviously too many to list here so for a quick overview, FSA funds can be used for:
- Prescription medicines
- Doctor’s co-payments and specialist visits
- Prescription eyeglasses or contact lenses
- Over-the-counter medicines and health products
- Menstrual care products
- First aid supplies
- Dental/vision expenses
- Medical diagnostic products
- Home health care items
Is a flexible spending account worth it?
Today, managing an FSA is easier than ever. Most accounts provide online benefits portals to handle every aspect of account management, offer FSA cards to cover qualified health expenses at the point of sale, and can cover thousands of eligible medical products and services. Plus, these accounts can have a real impact on your financial bottom line: a family making the median U.S. income ($59,000 per year) that elects the full FSA contribution for 2021 ($2,750) will save nearly $1,000 in federal taxes each year.