Medical-Related Savings Plans: What Is a Flexible Spending Account?
FSA plans can be used to pay medical, dental, and vision costs but must be spent by the end of the year
You probably know about checking and savings accounts, but how much do you know about accounts specifically for medical expenses?
There are three types: health savings accounts (HSAs), flexible spending accounts (FSAs), and health reimbursement arrangements/accounts (HRAs). Below you'll find information about one of the lesser-known options, the FSA.
What Is an FSA?
FSA plans can be used to pay for medical, dental, and vision expenses. Like HSAs, you can deduct any contributions you make to an FSA from your taxes. Unlike an HSA, however, you forfeit any contributions to the plan that you have not spent by the end of the year.
That being said, there are some employers that offer options to help employees avoid total forfeiture of unused money. Some will let you carry over up to $500 into the next year, and others will let you use the money for up to two and a half months into the new year. Usually employers will offer one option or the other, but not both, and many do not offer any such option.
FSAs are similar to HSAs in a couple of ways. One is that either you or your employer can make contributions to your account. Another is that you are usually provided with a debit card, a checkbook, or both when you open the account so that you can access your money.
What Does an FSA Do?
Also like HSA plans, you can use your FSA to pay costs that your health insurance doesn't cover, including co-payments, deductibles, prescriptions, and vision and dental expenses. There are also certain treatments and therapies it can pay for: birth control, pregnancy tests, insulin, crutches, chiropractic treatment, and programs to help you stop smoking.
Employees can contribute up to $2,600 in 2017 and have the funds be deductible. In addition, the employer can fund contributions, or they can be funded by both the employer and the employee. Employee matches are permitted up to $500.
Is an FSA a Good Choice for You?
FSAs are best for those who have ongoing and predictable medical expenses because unused funds are forfeited. These consumers will probably use all the money in the account before that happens. Those who are healthy and/or have few medical expenses have a higher possibility of forfeiting their money, so they may not want to go with an FSA.
FSA plans offer tax benefits similar to those offer by HSAs if you do use medical services regularly. You can deduct your contributions to the account, in effect enabling you to deduct medical expenses that may not be eligible for an itemized deduction.
Where Can You Get an FSA?
Employers sponsor FSAs. They are usually an option included in cafeteria plans.