What is FSA? Understanding Flexible Spending Accounts

What Does FSA Mean?

FSA stands for flexible spending account. It is a type of savings account that allows you to set aside pre-tax money from your paycheck to pay for eligible medical expenses. Enrollment in an FSA is completely voluntary. It is considered an employee benefit established by an employer, who may also choose to contribute to your FSA. The purpose of an FSA is to allow you to put aside pre-tax money to pay for healthcare expenses while also saving income tax.

What Are The 3 Types of Flexible Spending Accounts?

Health Care FSA (HCFSA)

A Health Care FSA (HCFSA) is a pre-tax benefit savings account. The money you put in your HCFSA account is not subject to payroll taxes, so you save money by paying less taxes. You can use the funds in your HCFSA account to pay for qualified medical, dental, and vision expenses that are out-of-pocket health expenses not covered by your health insurance plan.

Limited Expense Health Care FSA (LEX HCFSA)

A Limited Expense Health Care FSA (LEX HCFSA) is a variation of the standard FSA for people who are enrolled in a High Deductible Health Plan (HDHP) with a Health Savings Account (HSA). The funds in a Limited Expense HCFSA can be used towards eligible dental and vision expenses only.

Dependent Care FSA (DCFSA)

A Dependent Care FSA (DCFSA) is a pre-tax benefit savings account that can be used to pay for eligible dependent care expenses for children under age 12 and qualifying dependent adults who cannot care for themselves and live in your household, subject to specific guidelines set by the Internal Revenue Service (IRS).

How To Set Up A Flexible Spending Account (FSA)

An FSA must be set up through your employer. If you are a federal employee of an Executive Branch agency or an agency that has adopted the Federal Flexible Benefits Plan (FedFlex), you can sign up for the Federal Flexible Spending Account Program (FSAFEDS) during Open Enrollment.

What Are The FSA Contribution Limits?

The amount you contribute to your FSA is called the election amount. The IRS sets the minimum and maximum contribution limit each year. For the 2024 plan year:

The minimum annual election for each FSA is $100.
The annual maximum contribution limit for employees who participate in an FSA is up to $3,200 through payroll deductions for an HCFSA or LEX HCFSA. A spouse may also contribute up to $3,200 through their employer for a household contribution limit of $6,400.
The maximum annual contribution limit for a Dependent Care FSA (DCFSA) is $5,000 per household or $2,500 for married couples filing separately.

What Are FSA Qualified Medical Expenses?

Eligible Expenses for HCFSA

Medical expenses: Co-payments (co-pays), co-insurance, and deductibles
Vision expenses: Eye exams, contact lenses and supplies, eyeglasses, and laser eye surgery
Dental expenses: Exams, cleanings, X-rays, and braces
Professional services: Physical therapy, chiropractor, and acupuncture
Prescription drugs, insulin, and prescribed over-the-counter medicines
Over-the-counter health care items: Bandages, pregnancy test kits, blood pressure monitors, menstrual care products, etc

Eligible Expenses for LEX HCFSA

A Limited Expense Health Care FSA (LEX HCFSA) allows you to submit eligible dental and vision expenses only.

Eligible Expenses for DCFSA

Qualified expenses must be for dependents, which include children under the age of 13, a spouse who is physically or mentally unable to care for him/herself, or any adult who is claimed as a dependent on your tax return. Examples of eligible expenses for dependent care FSA include:

Daycare, nursery school, and preschool
Babysitting and nanny costs
Before and after-school care
Summer day camp
Care for a spouse or relative who is physically or mentally incapable of self-care and lives in your home
Transportation to and from eligible care

Benefits and Limitations of FSAs

Tax Advantages of Flexible Spending Accounts

The funds you contribute to your FSA account are deducted from your earnings and are not subject to income tax or payroll taxes. The funds are taken from your paycheck and deposited into your FSA account before taxes are deducted. The amounts contributed are, therefore, exempt from federal income tax, Social Security tax, and Medicare tax. In addition, the funds you withdraw from your FSA to pay for qualified medical expenses are not subject to tax. Therefore, an FSA allows you to reduce your overall tax burden.

Potential Savings on Healthcare

You can save an average of 30% on eligible health care expenses and dependent care services. There are several convenient, hassle-free payment and reimbursement options.

FSA Use-It or Lose-It Rule

A Flexible Spending Account (FSA) allows you to access the full amount of funds in your account on day one of the plan year. This covers you for any medical expenses early in the plan year, even if you have not contributed funds from your paycheck yet.

The money in your FSA must be used by the end of the plan year. A Health Care FSA allows you to carry over up to $640 from one plan year to the next plan year when you re-enroll. Employers can offer a grace period of up to 2-1/2 months of the following year.

Note: Any unused funds in your account at the end of the plan year are forfeited if your plan does not have a rollover option. Check with your employer or benefits administrator to ensure the carryover option (up to $640) is available to you.

How to Use a Flexible Spending Account

How to Enroll in FSA and Manage Funds

Enrollment in FSA Through Your Employer

An FSA must be offered through your employer. The benefits administrator at your place of employment can guide you through the enrollment process. At the time of enrolling in a flexible spending account, you will need to select the amount of funds you want to set aside in your FSA for the plan year.

Enrollment in FSA Through FSAFEDS

Enrollment in an FSA through FSAFEDS.gov can be done during the Open Season, which runs from mid-November to mid-December, concurrently with the Federal Benefits Open Season. Your employer does not play a part in the FSAFEDS enrollment process. You have to choose to enroll each year – your participation does not automatically carry over from year to year. You need to make elections (the amount of money you want to contribute to your FSA) during the Open Season. These elections will be effective for the benefit period (plan year) that follows.

To enroll with FSAFEDS, log in to your online account and follow the step-by-step process by clicking Enrollment. For any questions, contact the FSAFEDS Benefits Counselors toll-free at 877-FSAFEDS (372-3337), TTY: 866-353-8058, Monday through Friday from 9 a.m. until 9 p.m. Eastern Time. If you don’t have access to the internet, you can also enroll over the phone.

Timing of Enrollment

The plan year for your FSA does not have to match the calendar year. Your FSA plan administrator or employer will decide when the FSA plan year begins. There is an Open Enrollment period for FSAFEDS once a year.

Election Amount

As mentioned, when you enroll in an FSA, you are required to indicate the amount you want to set aside in your account for the plan year — this is called the election amount. The IRS sets the minimum and maximum limits (see above) for FSA contributions each year. You will need to fill out your FSA elections in the employee benefits system or by filling out a form during enrollment.

You cannot change your election amount during the year unless there has been a qualifying life event. Examples of qualifying life events that allow a change in election include marriage, divorce, birth or adoption of a child, change in dependent status, change in job status of a dependent, gain or loss of employer-sponsored health insurance or health flexible spending coverage, gain or loss of Medicare or Medicaid coverage, going on or returning from FMLA leave.

After experiencing an Election Change Event, you have 30 days from the date of the event to contact your employer and change your election amount.

How to File Claims and Get Reimbursements

Your employer or benefits administrator can help you file claims and get reimbursements for a flexible spending account set up through your place of employment. To use the remaining balance in your FSA on qualified expenses, you can use an FSA debit card at pharmacies, dentist offices, vision centers, medical clinics, or an FSA store. However, the card will not work at restaurants, shops, etc.

To manage all aspects of your FSAFEDS account, you can log into your online account, including checking your account balance, submitting claims, looking up eligible expenses, selecting reimbursement methods, and choosing to receive email or text alerts. You can also manage your FSA account through the FSAFEDs app.

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Frequently Asked Questions

What’s The Difference Between A Flexible Spending Account (FSA) and A Health Savings Account (HSA)?

A flexible spending account (FSA) and a health savings account (HSA) are both tax-advantaged ways to save for qualified medical expenses. However, there are several differences between an FSA and HSA:

Ownership: FSAs are owned by employers, while HSAs are owned by employees.
Eligibility: FSAs are only available through employers, and self-employed individuals don’t have FSA eligibility. HSAs require you to be enrolled in an HSA-eligible health plan (high deductible health plan or HDHP).
Contribution limits: HSAs often have higher contribution limits compared to FSAs.
Portability: HSAs are portable, so you can take them with you if you leave your job. FSAs are generally not portable.
Roll over of funds: FSA account holders can carryover up to $640 of tax-free funds at the end of the plan year. HSA funds automatically carry over to the next plan year.
Investment: Funds in HSAs can earn interest or be invested to grow over time. FSA funds cannot be used in this way.

Flexible Spending Account (FSA) vs Health Savings Account (HSA): Which is Right For Me?

You can’t contribute to both an HSA and an FSA (except a Limited Purpose FSA), so you will have to decide which tax-favored savings account best meets your needs. To decide between FSA vs HSA health reimbursement arrangements, consider your anticipated out-of-pocket health costs.

A flexible spending arrangement (Healthcare FSA) might make more sense if you have regular medical costs. You don’t have to be enrolled in high-deductible health plans (HDHPs) to open an FSA. Pre-tax contributions in your FSA, including your employer contributions, are available in full at the beginning of the plan year for qualified expenses.

Putting your pre-tax dollars in health savings accounts makes more sense if you don’t have frequent out-of-pocket health expenses. The funds in your HSA roll over from year to year, and your money can grow through investments and interest. If you do get hit with a large medical bill at some point, the money in your HSA should be able to cover the higher deductible. If there is any money in your HSA that hasn’t been spent on healthcare, you can access it at retirement without penalty.