A flexible spending account is a health savings account offered by employers. It allows you to reduce your taxable income by allocating pre-tax dollars for qualifying health expenses, such as prescription medications.
What is a flexible spending account?
A flexible spending account is a tax-advantaged account that allows you to contribute and use pre-tax dollars to pay for eligible health care costs. You do not need any specific type of health insurance to qualify for a flexible spending account, but it must be offered by your employer for you to enroll.
How does a flexible spending account work?
A flexible spending account can help you plan for expected medical expenses – and sometimes unexpected costs – throughout the year. Here’s what to expect if you enroll in a flexible spending account:
- Choose the amount you want to contribute. At the beginning of the plan year, when you enroll in your benefits, you’ll decide how much money you want to allocate to your flexible spending account for that year. In some cases, employers may also contribute to flexible spending accounts. In 2024, the maximum employee contribution to a flexible spending account can reach $3,200.
- Your plan starts. The amount you set for the year is available in full on the first day of the year. Your employer will deduct contributions from your paycheck in equal installments each pay period. Your employer may also contribute to your account.
- Use your money or file a claim as needed. Some service providers may give you a debit card for your flexible spending account, allowing you to cover eligible expenses at the time of purchase. Otherwise, you’ll pay the costs out of pocket and submit a claim to your flexible spending account provider, along with your purchase receipt.
- Use your money before the end of the year. You may lose funds in your flexible spending account if you don’t use them by December 31. Some employers may offer a grace period to use any remaining funds. Others may allow you to roll over a portion of your flexible spending account funds – if your employer does, you can roll over up to $610 for 2023.
Who is eligible for a flexible spending account?
You may be eligible for a flexible spending account if you are an employee at a company that offers this type of account. Your employer may have specific rules or eligibility criteria to qualify for a flexible spending account. Not all employers offer flexible spending accounts.
A health account can help you cover health care costs from year to year, such as over-the-counter medication costs. It also allows you to plan ahead and allocate pre-tax dollars for expected expenses.
What makes a product eligible for a flexible spending account?
The IRS determines qualifying medical and health expenses for a flexible spending account. In addition to costs like over-the-counter medications and home or vehicle health-related upgrades, this includes co-pays and deductibles you incur throughout the year.
It’s important to spend all the funds allocated in the flexible spending account offered by your employer within one year. Unlike a health savings account (HSA), funds in a flexible spending account do not always roll over to the next year.
How much should I contribute to a flexible spending account?
The first step in determining how much money to put in a flexible spending account is estimating your out-of-pocket medical expenses for that year. This can be challenging since you can’t always predict illnesses and injuries. Looking at the expenses from the previous year may be a way to try to gauge out-of-pocket costs.
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For 2024, the IRS has set the maximum annual contribution for individuals to flexible spending accounts at $3,200. Therefore, if you anticipate your medical expenses to be $267 per month, it may be best to take advantage of the maximum contributions to the flexible spending account to cover those expected costs with pre-tax dollars.
On the other hand, if you expect your medical expenses to be lower, contribute a smaller amount to the flexible spending account so that you do not end up with a large sum of money at the end of the year that you will need to either spend on qualified expenses or forfeit.
Can I pay my spouse’s expenses from my flexible spending account?
Funds in a flexible spending account can be used to cover qualified medical expenses for individuals, as well as their spouses and qualifying dependents. Your spouse can also contribute up to $3,200 to their own flexible spending account in 2024 to help cover the family’s healthcare expenses.
Do not contribute more to individual flexible spending accounts than you and your partner believe you will need for costs like copays, prescriptions, or medical equipment. Health insurance premiums cannot be paid with a flexible spending account.
Advantages and Disadvantages of Flexible Spending Accounts
Advantages:
- Tax savings. You can reduce your taxable income and lower your tax bill by using pre-tax dollars to pay for qualified medical expenses.
- Convenience. A flexible spending account can make it easy to plan for healthcare costs that you pay out of pocket.
- Employer contributions. Some employers may contribute to your flexible spending account, providing additional funds to cover qualified expenses.
Disadvantages:
- You may lose your money if you don’t spend it. Unless your employer allows you to roll over the funds in your flexible spending account, you may lose any amount you do not spend by the end of the year.
- Reimbursement limitations. Flexible spending accounts have strict eligibility requirements and may not reimburse you for all medical expenses, such as cosmetic procedures and some over-the-counter medications.
- Fixed contributions. You must estimate your contribution to the flexible spending account before the plan year begins. If you have unexpected medical expenses, you will not be able to increase your contributions.
What is the difference between a flexible spending account and a health savings account?
A flexible spending account and a health savings account are both tax-advantaged accounts you can use to pay for qualified medical expenses. However, there are key differences to note:
- Eligibility. To qualify for a flexible spending account, you must be employed by a company that offers this type of account. However,
Source: https://www.cnet.com/personal-finance/banking/advice/what-is-a-flexible-spending-account/
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