Flexible Spending Accounts Explained in Six Questions

The complicated stuff in life gets a little less complicated when you break it down into six basic questions: What, Why, Who, Where, How and When?

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 co-payments, some over-the-counter medications (as long as your doctor writes a prescription for it), prescriptions, dental visits and eye glasses. 

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 2019, you could contribute up to $2,700 to an FSA (2020 limits are still being decided).

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 $2,700 into your FSA for the plan year, that money is yours to spend when your coverage goes into effect.

What happens if you leave your job and haven’t paid up? Check with your plan, but for most of us the answer is nothing happens and there’s no bill.