What is a Flex Spending Account or FSA?
An FSA is a tax-advantaged financial account that is set up with your employer as part of your benefits program. (Sorry guys, not all of you are qualified but I'm lucky enough to work for an amazing company that offers amazing health benefits)
An FSA allows an employee to set aside a pre-determined amount of earnings to pay for qualified health or medical expenses and even daycare. Be careful as it's a use or or lose it type of program. You have to spend your pre-determined amount in the calendar year.
The part that saves you money is that the money taken from your earnings is NOT subject to payroll taxes!
How does it work?
I'll from experience here as I'm not sure this is the case with ALL FSA's but while signing up for your FSA you decide how much money you want in your account.
Using myself as an example I wanted to try it out this year without a huge commitment so I decided to put $500 into my account. At the advice of the calculator, it suggested a total of $499.98 to ensure that equal amounts of money are deducted from each paycheck and deposited into my FSA account. (That means $38.46 out of every paycheck is going into my FSA account)
The full amount of $499.98 is technically available as soon as my benefits start but you can track your progress online throughout the year to see what you've really accumulated.
You're issued a "benefits debit card" that links to your FSA account. When paying for approved expenses, you can either use your debit card or pay out of pocket and submit your receipts for reimbursement.
You can't go over your pre-determined amount set at the beginning of the year but you've got an entire year to use it.
How do you determine the right amount to put into your FSA?
I struggled with this one and as I mentioned I was very conservative knowing that I easily spend $500 a year on contacts, prescriptions and co-pays at my doctor.
I'm happy with my $500 commitment for now but I wish I had stumbled on Principal's calculator sooner as I'm sure I would have budgeted a little different.
What's an eligible expense?
Not all programs are the same but here a list of the basic types of expenses that are often covered within your FSA plan. Be sure to check with your health care provider for a full list.
- Medical and dental deductibles and co-payments
- Eye exams, contact lenses/solutions, and glasses
- Prescription drugs
- Orthodontia or other dental care
- Physical therapy and chiropractic care
- Medical devices such as hearing aids and diabetes testing supplies
- Smoking cessation programs
- Over-the-counter (OTC) products
What over-the-counter products are eligible expenses?
This one is a little tricky but keep this in mind, if it's used for "medical care" then you're good to go. For example, band-aids and cold medicine are okay while vitamins are NOT eligible because they're considered preventative care rather than medical care.
Where can you use your debit card?
Luckily most health care merchants accept FSA cards. This includes doctors, dentists, vision care facilities and other locations that sell only medical services or products. Check with you service provider as there are a number of non-health care merchants that also accept FSA debit cards. (For example, the Vons Pharmacy down the street from my house takes the card)
If you try and use your card at a non-approved merchant your card will be denied. This also means no ATM with drawls are possible.
*Note that even though this card is considered a "debit" card you DO NOT have a PIN number. When asked, always select the "credit" option. If asked for you PIN number, simply explain that this particular card does not have a PIN number.
Mistakes can happen
It's possible to accidentally use your card and at authorized merchant for an unauthorized purchase. If this happens, don't stress but be sure to contact your health care provider and let them know.
Keep you Receipts
Your health care provider or the IRS may need or ask for additional information so be sure to save all of your receipts! If you're asked to submit documentation and don't have any, your charges can be classified as ineligible and you'll have to reimburse your account out of pocket.
Hope this helps you understand FSA accounts a little more and if you spend any money at all on health/medical care it's worth looking into!
*Tip: A colleague of mine was wanting Lasik eye surgery and used his FSA account to pay for the procedure. He was able to pay for the Lasik tax free AND pay for it over the span of a year. Pretty cool huh? This might be on my agenda for next year!
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