Guide to Flexible Spending Accounts

This guide to flexible spending accounts (FSAs) will walk you through shopping for and setting up an FSA health insurance plan. Flexible spending accounts are a special type of tax-free savings account that builds money you can apply to medical costs outside of those covered by your health insurance plan. With an FSA, you pay for the medical costs and submit a reimbursement request against the savings you have accrued.

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Natasha McLachlan is a writer who currently lives in Southern California. She is an alumna of California College of the Arts, where she obtained her B.A. in Writing and Literature. Her current work revolves around insurance guides and informational articles. She truly enjoys helping others learn more about everyday, practical matters through her work.

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Laura Walker graduated college with a BS in Criminal Justice with a minor in Political Science. She married her husband and began working in the family insurance business in 2005. She became a licensed agent and wrote P&C business focusing on personal lines insurance for 10 years. Laura serviced existing business and wrote new business. She now uses her insurance background to help educate...

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Reviewed by Laura Walker
Former Licensed Agent

UPDATED: Jul 16, 2021

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Flexible Spending Account, called an FSA, is a special type of tax-free savings account that builds money you can apply to medical costs outside of those covered by your health insurance plan. The money you deposit into the plan is before taxes are applied to your salary, which means the money is completely tax-free. The limitation is that
you can only use the accrued savings for medical and health related costs.

Where you expect expenses that are not covered by your health insurance plan, taking advantage of an employer-sponsored FSA can be a good way to set aside money for later expenses in a way that is
never listed as income. The way it works is that you pay for the medical costs and submit a reimbursement request against the savings you have accrued. You still have to pay the costs out of
pocket, but your money will be returned once the claim is settled.

How FSA Plans Work

When you become eligible, you will receive a notice through your employer. Annual plans usually start on January first, but plan details may vary. Once you have been accepted in the plan, you will
be asked how much you want to contribute into it, and that amount will be deducted from your base pay. It is never recorded as taxes, and the amount of income you take home will be reduced by the
amount of the contribution, which could save you money on income taxes.

What is Covered by My FSA?

FSA funds can be used for a wide range of medical and health related costs. Most doctors and surgeons are supported, as well as vision, hospital services, and access devices such as wheelchairs,
hearing aids, and false teeth. Fees considered excess by your health plan, including seeing a specialist out of the network, prescriptions, and inpatient drug or alcohol treatment are all covered
by your FSA. You can even apply FSA funds towards copayments, coinsurance and deductibles required through your health plan.

The FSA Catch

The major problem with an FSA is that it is only effective for a limited amount of time. Most plans give you 90 days beyond the end of the coverage to use the money you have contributed to the
account. If you do not use the money in the account by that time, it will be lost to you. What this means is that you need to calculate your expected costs carefully to be able to take full
advantage of this option. Overpaying the account will not be reimbursed, so contributing the right amount is critical.

How to Calculate Your FSA

Make a list of all of the costs you currently have which are related to your health or medical care. This includes deductibles, prescriptions, aids and therapeutic devices, and anything else that
you are accustomed to paying for out of pocket. If you anticipate requiring the same amount of costs over the coming year, then set that amount aside in your FSA. The trick is to be accurate but
conservative, because anything you commit to the FSA must be used or lost.

FSA Plans are Limited

The primary advantage of an FSA is the deduction it makes on your income taxes. If you are relatively sure that you will need all of the funds, the plan is a good idea. But if there is some
question about how much you will have to pay, it may be more practical to open a savings account on your own and contribute to it regularly. You would lose the tax break, but you would gain more
flexibility, including the account continuing to build value over time, and your ability to use the funds for any purpose, not solely for medical expenses.

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