Can You Explain Flex Spending Accounts to Me?
by: Guli Fager
Q: Can you explain Flex Spending accounts to me? It’s open enrollment at work and my employer offers one and I don’t get it. I’ve heard you lose the money if you don’t spend it and so I’ve never signed up. Why would I do this and what can I spend the money on?
A: Great question! Lots of employers offer benefits that can be tough to understand, so in the financial planning process, we always review a person’s benefits package so they can be sure they’re taking advantage of everything that is offered.
There are two types of Flex Spending Accounts (FSAs) healthcare FSAs and dependent care FSAs. Dependent care FSAs have a cap of $5000 per household – per year– and can be used for certain child-related expenses. If you have a kid (or two) in daycare, you know that $5000 doesn’t go very far, but it’s still a way to reduce your taxable income and pay for some childcare expenses with pre-tax dollars.
I’m going to focus on healthcare FSAs, which have a much broader applicability. The first thing I like to point out about FSAs is that the dollars are withdrawn from your taxable income before any taxes are withheld. This means that whatever income tax you would pay on the dollars you put in the FSA you get to spend—this varies depending on your tax rate, but for most people, is at least 20%–so every dollar you save into your FSA has 20% more buying power. The maximum an individual can contribute for 2023 is $3050, which gives you almost $600 more buying power than if you spent $3050 in after tax money on eligible expenses.
So, what can you spend the money on? The IRS has a broad list of items that you can spend FSA money on, and some people will have expenses that make it easy to spend the maximum amount. If you pay $150 out of pocket to see a mental health therapist every two weeks, for example, your cost for those therapy sessions would be $3900 for the year. You can also use FSA funds for copays, prescriptions, abortion care, acupuncture, menstruation supplies, prescription eyewear (including sunglasses), condoms, breastfeeding supplies, childbirth costs (including doulas) and dental care. You can’t use the money for “cosmetic” care, like teeth whitening, botox, laser hair removal, even if those services are provided by medical professionals.
If you have minimal healthcare expenses, it might not make sense to contribute the full amount, but a FSA is a great way to increase the buying power of your dollars for routine expenses. And if you anticipate something more expensive in a given year—like needing some more expensive dental work, or childbirth—you can contribute the max in one year and reduce the next.
When contributing to an FSA (in contrast to a Health Savings Account, or HSA), the funds must be used in the plan year, or they are forfeited. Many FSA plans give you a debit card that you can use to pay for these expenses at the point of sale or when buying online. Otherwise, you can submit receipts for reimbursement from your plan. Your employer can offer either a “grace period” of an additional 2.5 months after 12/31 to spend the funds, or allow you to roll over up to $610 into the next year, but they don’t have to offer these options, so make sure you read the information from your employer. It’s not uncommon to wind up at the end of the year with a bunch of money left over in your FSA, so here is a comprehensive list of items you can purchase with those funds—don’t forfeit them!
Need help navigating how to combine finances with a partner? Want to figure out how to pay down debt and save for the future? Financial planning can help. Schedule a free consultation with Guli here. https://go.oncehub.com/MeetWithGuli
Have a question for a future column? Email Guli at gulif@tolerfg.com