Health Care FSA Basics
Tax-free Spending So You Pay Less for the Things You Need
Flexible Spending Accounts (FSAs)—sometimes called Reimbursement Accounts—allow you to contribute a percentage of your paycheck to a special account before taxes are applied to your pay. Then, you use this un-taxed money to reimburse yourself for eligible expenses. There are two types: a Health Care FSA for health-related expenses, and a Dependent Care FSA for day care expenses that you incur while you’re at work. Here we will discuss a Health Care FSA.
The Health Care FSA can bridge the gap between what your health plans pay and what you pay by applying your pre-tax contributions to eligible expenses. Your savings equal the amount of money you would have paid in taxes (usually about 30% depending on your tax bracket—it’s like paying $70 when the price tag is $100). You can use your Health Care FSA to pay for health-related expenses that aren’t covered by your medical, dental, vision or prescription plans. Examples include office visit copays, glasses and contacts (not covered by your vision plan), contact lens solution, hearing aids, chiropractic visits, dental care, and more! Go to www.irs.gov and search for Publication 502 for a complete list.
How Does it Work?
- When you enroll in the Health Care FSA, you decide how much money to contribute for the year.
- The money is taken out of your paychecks in equal amounts before taxes are applied to your pay. The money goes into your Flexible Spending Account.
- You don’t pay federal income tax, Social Security tax, and in most cases, state income tax on the money you contribute. The amount you would have paid in these taxes is how much you save. Average savings are about 30%.
- When you have an eligible expense, you pay it and then file a claim to be reimbursed with money from your FSA. Note: Some plans give debit cards you can use at the time of your purchase—if you use the debit card, you don’t need to file claims.
- You should save your receipts in case there is a question about whether an expense was eligible.
- You can be reimbursed for eligible expenses incurred by you, your spouse, or anyone you claim as an eligible dependent for federal income tax purposes—even if you or they are not covered by a medical/dental/or vision plan through your company.
How Much Can I Contribute?
The IRS sets a maximum amount each year and employers can set limits within that. For 2017, the maximum amount you can contribute to your Health Care FSA is $2,600/year. For 2018, that maximum contribution amount will be $2,650/year.
Important Deadlines: Use It or Lose It
You must use all the money you contribute to an FSA during the plan year for which you made the contribution. Money left in your account after the claim deadline will be forfeited—you don’t get it back, and it doesn’t roll over. This is the IRS “use it or lose it” rule. This simply means you should carefully consider how much you contribute. Be sure you contribute enough to get the benefit, but do not contribute so much that you have a significant amount of money left over. An easy way to estimate the right amount is to review your family’s medical, vision and dental bills from this year and consider what expenses you may have for next year. Note: Some companies allow a $500 carryover provision, which allows you to keep up to $500 for use the following year. Check your plan for details.
Day 1 Access to Funds
You can be reimbursed before the money is in your account. Starting on the first day of the year, you can file a claim for the whole amount you’ve committed to contribute for the year. This can help you spread the cost of health care services out over the year. You can manage large out-of-pocket expenses by paying your steady, pre-tax contributions each paycheck—you don’t have to scramble to find the money to pay for it all when you get the bill.
If you have any questions, please check with your plan administrator/HR Dept. or call your Diversified Team at 262.439.4800 and we can assist you.