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What Are Flexible Spending Accounts?

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Note: Under the 2020 CARES Act, in response to COVID-19 (the coronavirus) some rules about how you can use the money in your FSA funds have changed. Contact your FSA servicer, health insurer and/or human resources department for further information.

What is a Flexible Spending Account?

Also called a Flexible Spending Arrangement, an FSA is a savings account that you can use to pay for certain out-of-pocket medical expenses. 

There are a few types of FSAs, such as dependent care FSAs and limited purpose FSAs, which can be used for different purposes and have different rules. 

In this article, we’ll focus on FSAs that can be used to pay for qualified medical expenses. 

Why are FSAs attractive savings options?

The amount you contribute is tax-free, which means you’ll save money on certain medical expenses.

Who is eligible for an FSA?

Typically, to get an FSA your employer has to offer an FSA through your health plan. FSAs are not available with a marketplace plan.

Where can you use the money in your FSA?

You can use the money in your FSA to pay for qualified medical expenses like copayments, some over-the-counter medications, prescriptions, dental visits and eye glasses. 

New since March 2020, when Congress passed the CARES Act in response to Covid-19:

  • You can use your FSA to buy qualified over-the-counter medications without getting a prescription from your doctor. 
  • Qualified medical expenses now include tampons and pads as well as some other feminine products. We have no idea why it took a pandemic to get this considered essential, but ladies, the time has come.

The CARES Act is retroactive for both of these expenses, so if you purchased these items after December 31, 2019 and have the receipts, contact your FSA provide about how to get reimbursed.

FSAs follow the “use it or lose it” rule, so it’s a good idea to plan on how you want to spend the money in your account.

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How do FSAs work?

First, you have to fund it. If you choose a healthcare plan with an FSA, you decide how much money you’ll want to contribute for the year. You don’t have to pay the money up front. Instead, your employer will deposit money to your FSA throughout the year (i.e., every time you get paid). Note: sometimes employers will kick in money, but if they do, it’s considered income and it’ll be taxed.

In 2022, you could contribute up to $2,850 to an FSA ($2,750 for 2021).

Here’s how you use your FSA money to cover certain expenses:

  • Your insurer may give you what essentially amounts to an FSA debit card that you can use when you’ve got a qualified medical expense
  • You submit documentation to your FSA administrator for reimbursement

In both instances, it’s probably a good idea to hang onto receipts just in case your provider wants to confirm the money you’ve used or want refunded was applied to FSA-friendly expenses.

FSAs follow the “use it or lose it” rule, so it’s a good idea to plan on how you want to spend the money in your account. There are a few exceptions, but generally you can’t take your money into the next year and you can’t take the money with you to a new job. 

When can you use the money in your FSA? 

The amount you pledge to put into your FSA is ready to use even if the money hasn’t been pulled from your paycheck. This means, for example, if you said you wanted to contribute the full $2,850 into your FSA for the plan year, that money is yours to spend when your coverage goes into effect.

This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this site were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA or any of their affiliates, subsidiaries or divisions.

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