Flexible Spending Account

What is a Flexible Spending Account?

Both you and your employer may put money into a Flexible Spending Account (FSA). You don’t pay taxes on the money.

♦ There is some risk since technically the money belongs to your employer.

Employers have complete flexibility to offer various combinations of benefits when designing their plan. FSAs are usually funded through voluntary salary reduction agreements with your employer.

♦ Amounts contributed are not subject to federal income tax, Social Security tax or Medicare tax.

Your employer may also contribute.

The IRS refers to these accounts as Flexible Spending Arrangements. There are no reporting requirements for FSAs on your income tax return.

♦ Remember — technically the funds belong to your employer so if you are terminated or change jobs you cannot take the funds with you.

→ Unlike a Health Savings Account (HSA), where the money in the account belongs to you, not your employer.

There are time constraints when it comes to using funds from an FSA account.

IRS publication 969 titled: Health Savings Accounts and Other Tax-Favored Health Plans explains a lot of the tax requirements related to an FSA.

Publication 969 can be downloaded from the IRS website.

Flexible spending account rules

Things to understand about an FSA

• In 2024, FSAs are limited to $3,200 per year per employer. If you’re married, your spouse can put up to $3,200 in an FSA with their employer too.

• Dependent Care FSAs in 2024 are limited to $5,000 per year, per household.

• You can use funds in your FSA to pay for certain medical and dental expenses for you, your spouse if you’re married, and your dependents.

• You can spend FSA funds to pay deductibles and copayments, but not for insurance premiums.

• You can spend FSA funds on prescription medications, as well as over-the-counter medicines with a doctor's prescription. Reimbursements for insulin are allowed without a prescription.

• FSAs may also be used to cover costs of medical equipment like crutches, supplies like bandages, and diagnostic devices like blood sugar test kits.

• IRS Publication 502 lists generally permitted medical and dental expenses.

FSA limits, grace periods, and carry-overs

Before the Affordable Care Act (Obamacare) one significant disadvantage to using an FSA was that funds not used by the end of the plan year were forfeited to the employer, known as the "use it or lose it" rule.

You still generally need to use the money in an FSA within the plan year. But your employer may offer one of 2 options:

• It can provide a "grace period" of up to 2 ½ extra months to use the money in your FSA.

• It can allow you to carry over from 2023 up to $610 to use in 2024.

• The carry over from 2024 increases to $640 to use in 2025.

Your employer can offer either one of these options but not both. However, they are not required to offer either one.

At the end of the year or grace period, you lose any leftover funds in your FSA.

COVID relief amendments

Because of the pandemic, many people could not use the money they set aside in FSAs in 2020 and 2021.

COVID-19 relief legislation allowed employers to permit the carryover of unused FSA funds to plan years ending in 2021 and 2022.

♦ In June of 2023, the IRS said that High Deductible Health Plans (HDHPs) can cover COVID-19-related expenses before the minimum deductible is satisfied for plan years ending on or before December 31, 2024.

Check with your employer to see if they apply this changes to your plan.

♦ It is important to plan carefully and not put more money in your FSA than you think you'll spend within a year on things like copayments, coinsurance, drugs, and other allowed health care costs.