A flexible spending account (FSA), also called a “flexible spending arrangement,” is a savings account with specific tax advantages established by an employer for its employees. If you’re a Federal employee who works for an agency that has adopted the Federal Flexible Benefits Plan, you can access the Federal Flexible Spending Account Program (FSAFEDS). The Federal FSA program offers two types of FSAs: The Healthcare FSA (HCFSA) and the Dependent Care FSA (DCFSA).
Note: Do not confuse the FSA with a Health Savings Account (HSA), (Read about HSAs here). If you have established an HSA, IRS rules may prohibit/limit your eligibility for an FSA. Ensure you ask your human resource department about utilizing both accounts.
KEY TAKEAWAYS
- Funds contributed to FSAs are deducted from your earnings before they are made subject to payroll taxes.
- The money in an FSA must be used by the end of the plan year, but HCFSAs allow a $550 carryover, and DCFSAs allow a two-and-a-half-month extension.
- You can use funds in your HCFSA to pay for certain medical and dental expenses for you, your spouse, and your dependents.
- You can use funds in your DCFSA to pay for eligible work-related dependent care expenses.
- You can spend HCFSA funds on prescription medications, as well as over-the-counter medicines with a doctor’s prescription. Reimbursements for insulin are allowed without a prescription.
- You can use DCFSA funds on work-related dependent care expenses, such as day camps, babysitting, and after/before school programs.
- Remember to save all your receipts; it’s important not only for reimbursement claims but also in determining how much money to allocate to your FSAs for the following year.
- The deadline to incur expenses is the end of the plan year, Dec 31st (DCFSAs have an extension).
- Enroll during the Federal Benefits Open Season (November/December) for participation in the following year.
- Reenrollment is required as enrollment does not carry forward into the next year.
How Does an FSA Work?
Funding Your FSA
The FSA is funded through payroll deductions, and your elected contribution will be evenly divided and deducted from each paycheck throughout the plan year (Jan 1st – Dec 31st).
How Much Can You Contribute?
The IRS limits the annual contributions to an FSA account. For 2020 the limit per employee is $2,750; also, the FEDFSA program has a yearly minimum contribution requirement of $100.
When you are determining how much to contribute to your FSA, keep in mind that any remaining balance at the end of the year or grace period is forfeited. So, plan carefully, don’t fund your account with more money than you plan on spending on eligible expenses within the year. That being said, HCFSA participants can carry over $550 into the next year, and if you have a DCFSA, you have a two-and-a-half-month extension to finish using your account balance.
Using Your Healthcare FSA Funds
The funds in a Healthcare FSA can be used for eligible medical, dental, and vision care expenses. Depending on your healthcare provider and the reimbursement option you selected, you may need to submit a claim for reimbursement, or your healthcare provider may automatically submit the request for you.
Think of the HCFSA as a savings account to pay the costs that aren’t covered by your FEHB Plan or the Federal Employees Dental and Vision Insurance Program.
Using Your Dependent Care FSA Funds
The funds in a Dependent Care FSA can be used for eligible dependent care expenses.
Think of the DCFSA as a savings account to pay the costs of work-related dependent care expenses.
Tax Advantage
The tax advantage of saving is the same for both FSAs. Your contributions are deducted before taxes, therefore, reducing your taxable income for the current year and essentially allowing you to use dollars that would have went to Uncle Sam to pay your healthcare and dependent care costs.
Note: Confirm with your human resource department to ensure you meet the extension eligibility requirements. And if you find yourself scrambling to spend your FSA funds, consider stocking up for the next year or prepaying expenses.
What Are Eligible Expenses?
The HCFSA can be used to pay for your medical expenses and those of your spouse and dependents. Some eligible costs include:
- Copayments
- Coinsurance
- Prescription drugs
- Birth control
- Pregnancy tests
- Insulin
- Over-the-counter medical devices, such as bandages and crutches
- The Cost of your insurance premiums Are Not Eligible
Review IRS publication 502 for a full list of eligible medical expenses.
The DCFSA can be used to pay for your dependent care expenses. The following are some eligible expenses:
- After School Programs
- Adult daycare center
- Babysitting (work-related, in your home or someone else’s)
- Custodial elder care (work-related)
- Day Camp
Review IRS publication 503 for more information on eligible dependent care expenses.
Final Thoughts
As most things go in financial planning, there’s no one-size-fits-all when it comes to flexible savings accounts. To decide if either FSA is right for you, take stock of your healthcare and dependent care expenses. If you have any eligible ongoing or expected costs in the upcoming year, an FSA may be a great use of your money. If you can’t think of ways you’d use the account, then you probably don’t need one. Most young, healthy individuals with decent benefits should have low out-of-pocket expenses, so an HCFSA may not be worth the effort. However, those same individuals may benefit from using a DCFSA to pay for their dependent care expenses. You can find additional resources on the FSAFEDS website. Lastly, this article is solely for informational purposes. If you would like help developing your financial plan, consult with a qualified financial planner.