If you work a full-time job, you likely have medical benefits included in your employment plan. Lately, if you’ve been following the news—or living your life—you might have realized that your medical insurance may not cover all of your healthcare costs.
As a result, your employer may offer you the option of a flexible spending account (FSA). FSA are an important part of your benefits package and can help you save money. An FSA lets you pay for eligible out of pocket healthcare expenses with pre-tax dollars, thereby reducing your taxable income .The money you put into this account could help cover the costs of copayments, deductibles, certain prescriptions, and more.
Your employer may also throw some money into your FSA account, but they are under no legal obligation to do so.
How to Get an FSA
First, your employer has to be up for it. If they aren’t, you could get together with like-minded employees and build a case for it, then present your argument to your employer.
If your employer is on board for an FSA, you simply submit your claim to the FSA through your employer . You’ll need proof of the medical expense (usually a receipt), and a statement that says that your regular health insurance does not cover that specific expense. You human resources department might be able to help you gather this information and do the paperwork.
The IRS has published a pamphlet on the ABCs of FSAs. Here are some fast facts to help you get a grip on its benefits. According to this list:
• FSAs are limited to $2,650 per year, per employer. Your spouse can also contribute $2,650 to their FSA account as well.
• The money you contribute to your FSA can be used only for certain medical and dental expenses, including certain prescription medications.
• You can use your FSA to cover the costs of certain medical equipment, including crutches, bandages, and other supplies, and certain diagnostic services.
• You can use the account for yourself, your spouse, or your dependents.
• You can use your FSA for paying deductibles and copayments, but not for health insurance premiums.
• You don’t need a prescription to get reimbursed for insulin.
• You must re-enroll in an FSA account each plan year. Passive enrollment is not permitted.
• You might want to refer to the entire list of what the IRS allows and doesn’t allow when using an FSA and keep it handy.
An FSA Has Limits
An FSA sounds great, except there is a catch. In some cases, you must spend all of your FSA money within the actual medical-plan year. Any unused funds at the end of the plan year will be forfeited so plan carefully! This may or may not be doable for you, so your employer may be able to step up with a few alternative (and legal) options:
• A “grace period” of no more than 2½ extra months to spend that FSA money
• Carrying up to $500 a year to use in the following medical-plan year
Your employer may be able to offer one of these options, but not both.
As tempting and as practical as it seems, you might not want to put more money in your FSA than you think you will actually need. One way to do this is to calculate all deductibles, copayments, coinsurance, prescription drugs, and other possible costs for the coming year.
Flexible Savings Account (FSA) vs. Health Savings Account (HSA)
You may have also heard of a Health Savings Account (HSA) , and it’s easy to confuse the two. These two accounts are rather similar, except that a Health Savings Account (HSA) allows your savings funds to roll over from year to year—unlike an FSA, there is no deadline to spend your money.
Both types of accounts have tax advantages , and both are meant only for health-related expenses. Both are able to be funded by employee-payroll deductions, employer contributions, or individual deductions. Both plans require a doctor’s prescription to use the account for over-the-counter (OTC) medications.
Here are some other specifics that distinguish HSAs:
An HSA can only be established in conjunction with an HSA-qualified high deductible health plan (HDHP) .
Whatever money is placed into an HSA can be used in the future for qualified medical expenses, even after you are no longer covered by that HDHP . And that money is still tax-free.
The maximum amount of money you can contribute to your HSA per year is $3,450 if you have individual HDHP coverage. If you have a family plan, the total contribution allowed is $6,900.
If you quit or are fired from your job, your HSA can go with you. This happens even if your employer contributed money to the account.
If you need to take money out of your HSA for reasons other than those that are health-related, you will be taxed on that withdrawal , and there is an additional 20% penalty applied to the withdrawal.
If you withdraw money from your HSA after age 65 , the transaction will be penalty-free, but you will still be taxed on the withdrawal.
Not Everybody Is On Board With HSAs
Those in favor of HSAs argue that the plan forces users to be more careful and less wasteful about their health care spending and doctor visits. The plan could also increase price and quality competition and bring more of the uninsured into the fold.
critics of HSAs argue that health savings accounts benefit the young and healthy, while those with regular medical problems or who are older may end up paying more if they select an HDHP/HSA combination, because they tend to drain their savings with more frequent up-front medical expenses.
The good news is that HSA-qualified plans are required to cover preventative care with absolutely no cost sharing, before the deductible.
How to Use FSA Money
Money not used in your FSA is money lost. For example, here at SoFi we have a non calendar year benefits plan that goes October thru September. This often trips people up as they elect the full amount, anticipating being able to use it all the way through December, and then they are surprised when their unused funds are forfeited at the end of September.
This can be avoided, though! You could consider some of these strategies to get the most out of your FSA:
• Buy non-prescription items. Certain items are FSA-eligible without needing a prescription (but save your receipt for the paperwork!). These items may include first-aid kits, bandages, thermometers, blood pressure monitors, ice packs, and heating pads. Check out the FSA store to find out which items may be covered.
• Get your glasses. If you wear non-prescription (reading) glasses—the kind you find in a drugstore—you may not need a prescription for them to be covered by your FSA fund. And if you’re like many people, you might lose or break those glasses often. A strong backup supply could come in handy. If you need a bit more help with your sight, you could get a prescription from your optometrist and use it to buy prescription glasses or contact lenses. Contact lens solution may also be covered.
• Keep family planning in mind. FSA-eligible items can include: condoms, pregnancy tests, baby monitors, fertility kits. If you have a prescription for them, female contraceptives may also be covered.
• Don’t forget your dentist. Unfortunately, toothpaste and cosmetic procedures are not covered by your FSA, but dental checkups and most of those involved costs might be. These could include copays, deductibles, cleanings, fillings, X-rays and even braces. Mouthguards, and cleaning solutions for your retainers and dentures may be FSA-eligible as well.
Using an FSA to Avoid Using Your Credit Cards
Leaning on an FSA sure beats having to charge all of these expenses on your credit card. You probably know all about that rabbit hole and how difficult it can be to pay off credit cards. Little emergencies and surprises—including healthcare costs and expenses—can add years of interest and misery to your credit card repayment experience.
However, there is still hope to right this path. SoFi Relay can help track expenses and set goals—all on your phone and with no cost. SoFi Relay makes it easy to know where you stand and what you spend to help get all of your ducks in a row.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.