Medical-Related Savings Plans: You Can Save Money on Taxes With Flexible Spending Accounts

FSAs can be used to pay for a variety of qualifying medical dental and vision costs but contributed funds must be spent by the end of the year

Flexible Spending Accounts allow employees with employer offered health plans to set aside before tax dollars to cover out of pocket medical dental and vision expenses. Contributions reduce your taxable income for federal Social Security Medicare and most state tax purposes including North Carolina income tax. In exchange for this tax saving you must use the funds by the end of your plan year or lose any unspent balance under the use it or lose it rule. Understanding plan rules estimating your annual costs and tracking your expenses closely ensures you capture the tax benefits without forfeiting money.

What Is a Flexible Spending Account

An FSA is a special account offered by some employers that lets you designate a portion of your salary to pay qualifying health care costs on a before tax basis. Your employer deducts your election from each paycheck and holds the funds for reimbursements. You decide your contribution amount each year during open enrollment but you cannot change it mid year unless you experience a qualifying life event. Most employers offer a health care FSA as part of their benefits package alongside medical dental and vision plans.

Eligible Expenses

FSAs cover a wide range of expenses that your health plan may not pay in full including:

• Health plan copayments coinsurance and deductibles
• Prescription drug copayments and certain over the counter medications with a doctor’s prescription including insulin
• Dental care such as cleanings fillings orthodontia and dentures
• Vision care including eye exams prescription eyeglasses contact lenses and fitting fees
• Medical supplies such as crutches blood pressure monitors diabetic testing strips and bandages
• Chiropractic and physical therapy sessions acupuncture and certain fertility treatments

Expenses may apply to you your spouse and dependents as defined by your plan.

Contribution Limits and Plan Rules

For plan year 2025 the IRS allows employees to elect up to $3,200 per employer to a health care FSA. If you have two employers you may contribute the limit at each job. Employers may offer either a grace period of up to two and a half months after the plan year ends to incur claims or a carryover of up to $610 to the next year but they cannot offer both. Your employer decides which option applies and you must use any grace period or carryover funds before the extended deadline.

Estimating Your FSA Contributions

To avoid forfeiture sit down and review your past year medical dental and vision spending. Include routine expenses like copayments and preventive visits plus any planned procedures such as fillings root canals or laser eye surgery. Add an allowance for unplanned costs such as prescription changes or emergency care. Round up slightly to cover unexpected items if your plan allows carryover or a grace period. Avoid overshooting by more than the carryover limit or risk losing money.

Limited Purpose FSA for HSA Participants

If you are enrolled in a high deductible health plan with a Health Savings Account your employer may offer a limited purpose FSA. This account works like a regular FSA except you may use it only for vision dental preventive and certain other IRS approved expenses. Funds in a limited purpose FSA do not affect your HSA eligibility and can supplement your before tax savings for non medical out of pocket items.

Tax Advantages and North Carolina State Conformity

Contributions to your FSA reduce your federal taxable wages and lower your Social Security and Medicare earnings. North Carolina follows federal adjusted gross income so FSA contributions also reduce your state taxable income. Check with the North Carolina Department of Revenue for any state specific updates each tax year. Using all your FSA funds maximizes the savings on your final tax return.

Claiming Reimbursements and Deadlines

Most plans allow you to submit claims online through a benefits portal mobile app or by mail. You must include receipts an itemized Explanation of Benefits or a doctor’s prescription for over the counter items. If your plan offers a grace period you may submit claims for expenses incurred during the grace period up to the extended deadline. Keep copies of all documentation in case of audits and track your spending carefully throughout the year.

What Happens When You Leave Your Job

FSAs are owned by your employer so any unused funds generally revert to the plan when you separate from service. You may continue to submit eligible claims for expenses incurred before your termination date if your plan allows a run out period usually lasting ninety days after the plan year ends. Some employers offer FSA continuation under COBRA on an after tax basis. Check your summary plan description for details before you leave.

Comparing FSAs HSAs and HRAs

FSAs are employer owned with use it or lose it rules while Health Savings Accounts are owned by you and funds carry over indefinitely. HSAs require enrollment in a qualified high deductible health plan and allow both employer and employee contributions. Health Reimbursement Arrangements are employer funded only and may offer more flexible reimbursement but cannot accept employee elections. If you qualify for an HSA consider pairing it with a limited purpose FSA to cover more expenses on a before tax basis while retaining HSA funds for future needs.

Strategies to Maximize Your FSA Benefits

• Track expenses weekly and submit claims promptly to avoid last minute underspending
• Use employer calculators or mobile apps to forecast contributions based on your medical history
• Consolidate receipts and maintain a folder or app with scans of your documentation
• Schedule elective procedures early in the year to ensure full use of available funds
• Coordinate with your spouse’s FSA if both of you have separate accounts to cover shared expenses
• Review open enrollment materials and employer notices each year for any rule changes

Resources for North Carolina Residents

The North Carolina Department of Revenue provides guidance on pretax benefits and state conformity on its website or by calling (919) 814-1095. For questions about FSA claim denials or plan compliance you may also contact the North Carolina Attorney General’s Consumer Protection Division at (919) 814-5400. Employers must provide a summary plan description that outlines your rights and deadlines so review that document carefully.

When used wisely Flexible Spending Accounts deliver significant tax savings on expected health care costs but demand careful planning and record keeping to avoid forfeiting contributions. Estimate your needs accurately follow plan rules and use available resources to make the most of your FSA in 2025.