A Flexible Spending Account (FSA) is an account that can be used for medical expenses that your regular health insurance does not cover. The money for a flexible spending account is taken out of your pay check prior to any federal or state taxes and put into a separate account for your use, saving you money in taxes on each check.
Employers that offer flexible spending accounts to their employees will sit down with them once a year, usually in early January. During the meeting, you will calculate how much money you wish to put into your flexible spending account for the year and determine how much will come out of each pay check. For example, if you wish to put $8,000 into your flexible spending account and you get paid weekly, you will about $155 a week into your flexible spending account. The IRS does not put a cap on how much you can put into your account, but your employer likely will. It may be tempting to put in more than you need to benefit from the tax breaks, but keep in mind that you will not get any unused money back at the end of the year. For this reason, you should only pay in what you truly think you will need.
The enrollment period for an FSA generally begins on January 1 and lasts until March of the next year, though you should be sure to check with your employer as some still end the year on December 31. One great benefit of an FSA is that the money is available right away. If, on January 1, you decide you will put $8,000 into your FSA, the entire $8,000 will be available if you need it on January 15, allowing you to save money since you can take the entire year to pay into the $8,000. Another benefit is that you do not have to pay back the money if you lose your job in the middle of the year for any reason.
FSA accounts cannot be changed throughout the year unless you have a life-changing event. These events include things such as giving birth to a baby, getting married or divorced or having a death in the family. If you wish to change your FSA account because of a life-changing event, you will need to apply the changes within 31 days of the occurrence.
Flexible Spending Accounts can be used for things such as co-payments and deductibles, expensive prescription medications that your regular health insurance won’t cover, glasses and contacts, special schooling for mentally or physically disabled dependents and even over-the-counter medications and first aid products.
Flexible Spending Accounts are a great option if you know your health insurance won’t cover everything that you need it to, but you can’t afford to pay a lump sum for medical expenses.