What is FSA?

What is FSA? This is a question asked by employees across the country. Some employers offer a health flexible spending account, or FSA, as a benefit for employees. Specific to the U.S., an FSA is a savings account that comes with tax advantages for you, the employee. The idea is to fund the account with pre-tax money and then use the funds for certain types of health and medical expenses. In addition to you as the employee, your spouse and dependents can also use the FSA. Eligible dependents also include adult children who are no older than 26 years old.

To fund your FSA, you'll have a pre-determined amount deducted from your paycheck. The big bonus here is that you don't pay taxes on any of the money put into your FSA.

Another type of FSA is called WageWorks®, which is also a pre-tax account. The goal with this account is to pay for qualifying expenses that otherwise wouldn't be covered through your current health insurance plan. You can use it for expenses related to medical, vision, or dental care.

FSAs are popular because they're easy to use and can lead to major savings on health related expenses you were probably going to pay for anyway.

Why is it a good idea to have a health FSA?

Anyone can benefit from having an FSA, whether you're single, starting a family, or preparing for retirement. The bottom line is that when you earmark pre-tax dollars for your FSA, you end up paying a smaller amount of taxes (or potentially taking home more if you typically receive a tax return). Your savings depends on your specific tax bracket. The details of your FSA are determined by your employer, but you may be eligible to rollover as much as $500 in unused cash each year. An FSA can also help you with ongoing medical expenses or even expected health related events coming up in the next year.

What expenses are covered under a health FSA?

Not all medical and health expenses can be covered by your FSA and the rules are determined by both the IRS and your employer. The most basic requirement is that an eligible health expense must be paid out of pocket for care given to you, your spouse, or one of your dependants. Medical care is defined by the IRS as any service or item that helps to diagnose, treat, or prevent any type of disease or illness. You can also use your FSA to cover any transportation costs that are incurred when receiving medical care.

Another rule associated with eligible expenses is that you can't double dip, meaning that if you get reimbursed for a medical expense from your FSA, you can't be reimbursed from anyone else, like your health insurance company. Additionally, you must use your FSA funds during the designated plan year, which has a distinct start and end date.

Medical equipment and certain treatments may also be eligible, including:

  • Prescription medication
  • Insulin and supplies for blood sugar testing
  • Birth control, pregnancy tests, and breast pumps
  • Bandages and crutches
  • Acupuncture and chiropractic care
  • Psychological care
  • Smoke cessation

Some of these may require approval from your doctor or care provider.

Are over-the-counter medicines eligible expenses?

You can use your FSA for over-the-counter medicine but you'll still need a prescription from your care provider. The doctor must be in the state where you buy the medicine, with the exception of insulin.

What over-the-counter items are still eligible expenses?

Other over-the-counter items are eligible, including bandages and thermometers. Additionally, you can use your benefit card at the checkout counter.

Can I use my FSA funds to stock up on over-the-counter items?

By rule, you can't use your FSA to stock up long-term with items purchased over-the-counter. Instead, try to anticipate your needs for the plan year only; otherwise, you risk not being reimbursed.

What expenses are not covered under a health FSA?

FSAs come with a number of ineligible expenses, including:

  • Cosmetic surgery and procedures
  • General health herbs, vitamins, and supplements
  • Insurance premiums
  • Counseling (family or marital)
  • Personal care, like makeup and toothpaste
  • Prescription drugs from outside the U.S.
  • Gym memberships

Services performed outside the plan year are also ineligible, as are any expenses you've been reimbursed for elsewhere.

How do I use my FSA for orthodontic services?

It is possible to use your FSA for orthodontic service, but the process is a little bit different since you may receive these services over an extended period of time -- even beyond your plan year.

Once you receive a receipt from your orthodontist, you can submit it as documentation necessary for payment. It is then verified and your orthodontist will be paid from your FSA.

Is there a limit to how much I can contribute to my health FSA?

FSA plans are now capped as a result of the Affordable Care Act. You may only contribute up to $2,600 each year. You also need to plan wisely because if you don't use all of your funds, you can lose the money entirely in the next plan year.

Is there a limit to how much my employer can contribute to my health FSA?

Some employer contributions may be made on top of the $2,600 limit. Additionally, this limit only applies to an FSA. You may contribute to other accounts such as a dependent care FSA, a health savings account, or even a health reimbursement arrangement.

Can my spouse also contribute to an FSA?

Spouses may also contribute towards the $2,600 FSA limit, as long as they meet all of the eligibility requirements.

How much money is available during the plan year?

You can start using your FSA as soon as the plan year starts. While active, your funds are spent as your claims are paid. Employers can set limits for medical expense FSAs and dependent care FSAs are maxed out at $5,000 annually.

How often are reimbursements made?

Contact your employer to find out their specific reimbursement schedule.

How do I keep track of my account activity?

You can log onto your FSA account online anytime that is convenient for you.

Where can I get a reimbursement request form?

Reimbursement request forms are also available when you log onto your account online.

What do I need to submit along with a reimbursement form?

Be sure to keep original itemized receipts to back up each one of your FSA expenses. To get reimbursed for an office visit, you can use either the Explanation of Benefits from your health care plan, or a bill that lists out the patient's name as well as the service provided and the date, and how much was charged to you.

To get reimburse for prescription drugs you'll need a statement from you pharmacy that has the patient's name, the prescription number, the drug name, when you got the prescription filled, and how much it cost.

You'll need the same information for any over-the-counter medicine you purchased, as well as an over-the-counter prescription from your doctor. You'll also need an itemized receipt for any health care products that are purchased over-the-counter.

What happens if I have funds left in my health FSA at the end of the plan year?

The answer to this question varies depending on your employer and how your specific FSA is set up. The first option your employer may offer is a carryover. This lets you keep up to $500 of unused money in your account to use during the next plan year. The other option you may have is a grace period extension. With this, you'll get more time to use your leftover FSA funds. You typically have two and a half months after your plan year ends.

What is a run-out period?

Your run-out period lets you submit claims after the plan year ends, but for expenses that were incurred during the actual plan year. This is different from the grace period extension because the run-out period just gives you more time to submit your receipts from old expenses. The grace period extension actually allows you to spend leftover funds from last year's FSA.

What is the "use-it-or-lose-it" rule?

The "use-it-or-lose-it" rule was created by the IRS and is the regulation that requires you to forfeit unused funds at the end of the plan year. Depending on your employer's FSA plan, you do potentially have the option to rollover up to $500 or receive a grace period extension. However, you won't receive anything back as cash, nor can you transfer excess funds to another FSA. Again, this is why it's so important to review your FSA spending regularly and adjust your contributions in the next plan year as you see fit.

Can I change my election amount?

The only way to change your election amount during the plan year is if you have a qualified event. This could be a change in status or some other change at work. Also confirm that the FSA plan chosen by your employer allows for such changes mid-year.

What happens if I stop working for this employer?

Your FSA benefits are contingent upon remaining with your employer. If you leave your job, you also leave your FSA plan and your contributions will immediately cease. You also won't be reimbursed for any eligible expenses incurred after your employment ends. Unfortunately, any money left over in your FSA remains with your company -- you don't receive any of it back. You can, however, choose to enroll in COBRA and finish using your FSA until the plan year ends.

What are the differences between HSAs, HRAs and FSAs?

There are three different account types you can use to pay for qualified medical expenses; HSAs, HRAs, and FSAs. In some plans, you may receive a debit card to make purchases directly from your account. There are a few key differences among these three accounts.

Health savings account, or HSA

If you have an HSA-eligible health insurance plan, you can contribute to an HSA to help cover health care costs. Like an FSA, your pretax contributions are deducted from your paycheck. A key difference, however, is that you can also contribute after-tax funds and then deduct those contributions from your income when you file for taxes.

Health reimbursement arrangement, or HRA

This type of fund is created by your employer. Your employer is the one to make contributions to help pay for expenses that aren't covered by your health care plan. These could include your coinsurance or deductibles. You're not eligible to contribute to the HRA, only your employer is, so it's more like an added bonus to whatever other type of FSA you may have.

Flexible spending account, or FSA

Employers create FSAs, but the employee is the one to actually add funds to the account. You also get the discretion of how you want to use your funds. If it sounds like a good choice for you, most PPO health plans allow for an FSA.

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