Flexible spending account (FSA)

Many taxpayers use a flexible spending account or FSA to save money on the taxes that they owe. However, taxpayers should be careful to avoid certain pitfalls when electing to use a flexible spending account in order to losing money on this important tax break offered by employers. The following explanation gives some more details on Flexible Spending Accounts (FSAs) and how to best use them.

 

What is a Flexible Spending Account (FSA)?

In summary, a taxpayer can use a Flexible Spending Account (FSA) to pay for copayments, deductibles, some drugs, and other health care costs that must be deemed approved by the IRS. There are some limits on how much money you can save away in a Flexible Savings Account. For example, FSAs are limited by the IRS to a maximum of $2500 per year. The money is taken out of a taxpayers pay check before the amount is taxed. This means that the taxpayer does not pay taxes on the money used and thus can save money by not paying taxes.

Flexible spending account (FSA)

All this might sound good and be a way for a taxpayer to save money, but there is one big drawback to using FSAs to pay for health expenses. This drawback is called the use-it-or-lose-it requirement and it is projected that it costs workers millions of dollars each year. This law that is enforced by the IRS requires workers who are enrolled in a flexible spending plan to spend any FSA contributions by the end of the company’s benefit year. In most cases is Dec. 31.  is the end of the benefit year and any leftover account amount is forfeited by the taxpayer. There is no way that they can reclaim this amount once it is forefeited.

 

New Flexible Spending Account Laws

New laws are allowing some relief to this drastic measure. Certain classes of flexible pending-plan participants now are allowed to make FSA claims against their accounts for up to two months and 15 days after the end of their benefit year (which is usually Dec 31). These employees can make a claim after the year is over for expenses incurred in the prior year and have it reimbursed by the FSA. However, the important limitation is that the medical care must of been incurred in the prior year. An expense incurred after the end of the benefit year would not be eligible for reimbursement from the FSA.

With these rules in mind, employees that have access to such FSA plans should consider enrolling in them to save taxes on medical expenses.  For more flexible spending account information see the IRS website.

 

FSA limits, grace periods, and carry-overs

Taxpayers can put up to $2500 into an FSA each tax year. You generally must use that money within the plan year, but this is not always the option. Your employer may offer one of 2 options:

  • It can provide a “grace period” of up to 2 ½ extra months to use the money in your FSA.
  • It can allow you to carry over up to $500 per year to use in the following year.

Your employer can offer either one of these options but not both. It’s not required to offer either one of these FSA options. 

 

FSA Grace Period

At the end of the year or grace period, you lose any money left over in your FSA. So it’s important to plan carefully and not put more money in your FSA than you think you’ll spend within a year on things like copayments, coinsurance, drugs, and other allowed health care costs.