What Are Flexible Spending Accounts?

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.

How 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 eyeglasses.

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 ($3,050 for 2023).

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

• Your insurer may give you 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 on to receipts just in case your provider wants to confirm the money you’ve used was applied to FSA-eligble 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 carry your funds over 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. So, for example, if you said you wanted to contribute the full amount into your FSA for the plan year, that money is yours to spend when your coverage goes into effect.