Flexible Spending Account Basics
When you or a loved one need medical care, insurance will likely cover some of the larger costs. But, it may not cover everything. Expenses like over-the-counter pain reliever and doctor's office co-pays can still come out-of-pocket. When you or someone you love is feeling sick or needs treatment, the cost of comfort can really add up.
Out-of-pocket costs for medical care can be frustrating to manage, especially if you're on a budget. To help you handle these expenses, though, some employers offer flexible spending accounts (FSAs) as an added benefit for employees. If this benefit is an option for you, you may want to continue reading to learn more about FSAs and how they can help.
What Is a Flexible Spending Account?
A flexible spending account is a voluntary, employer-sponsored program that reimburses out-of-pocket costs not covered by the participant's health insurance. For this program, a portion of pre-tax income is removed from the participant's paycheck every pay period and contributed to a personal tax-free savings account. Distributions from the account are made tax-free to cover qualified medical and dependent care expenses. This ultimately reduces the participant's overall tax bill, while also providing more tax-free money to spend on the medical purchases he or she needs most.
The two main types of FSAs are as follows:
Health Care FSAs
A health care FSA reimburses qualified out-of-pocket health and medical expenses for you or a family member. Qualified expenses include:
- Over-the-Counter Medication
- Prescription Co-payment
- Dental Care
- Eye Exams and Vision Correction
Dependent Care FSAs
With a dependent care FSA, your contributions can be used to pay for supervised care for a dependent loved one. Fees that directly influence a participant's eligibility for care may also be included. The following are a few examples of qualifying supervised care expenses:
- Daycare and After-School Care
- Adult Daycare
- Babysitting or Nanny Services
- Fees Associated with Supervised Care Applications or Enrollment
How Does an FSA Work?
When you enroll in an FSA, you will first need to estimate an amount to be set aside for a year's worth of out-of-pocket medical expenses. Every payday, money is withheld from your paycheck before taxes are applied, and that sum is added to your FSA. Then, when an expense arises, you can use the funds you have contributed to the FSA to supplement the cost. Any funds spent on qualified medical expenses are tax-free.
Keep in mind that FSAs are "use it or lose it" accounts. In other words, money not spent by the end of the tax year is lost. Because of this stipulation, it's important to consider your initial yearly estimate carefully before enrolling.
Consider an FSA if you have someone depending on you, or if you want a new way to manage your out-of-pocket medical expenses. After you enroll in the program, your FSA will grow with every paycheck. Therefore giving you more resources for an affordable healthcare or to the health of a person in your care.