Employees are often brought on flexible spending arrangements by employers without a thorough understanding of what they are or their pros and cons. This article explains the flexible spending account’s pros and cons.
What is an FSA Account?
A flexible spending account (FSA) is a savings account that allows the account holder to contribute a portion of their regular earnings to pay for qualified expenses related to medical and dental costs. Also, a dependent-care FSA type is operated to pay for care expenses for children aged 12 and under and qualifying adults, including a spouse, who cannot care for themselves and meet specific IRS guidelines.
How a Flexible Spending Account Works
An FSA ensures reduced tax liability in the form of funds that you contribute from your salary before tax. Usually, the 2020 IRS contribution limit per employee is $2,750 for medical expenses. Employers are also permitted to voluntarily contribute to the FSA. They don’t have to, but if they do, their contribution does not reduce the amount that the employee is permitted to contribute. Also, all the money set aside in an FSA generally must be used by the end of the plan year.
Is There a Grace Period for Flexible Spending Accounts?
If you end the plan year with FSA funds left, the IRS allows a maximum of 2 and a half months of grace period to spend those funds. However, not all employers offer the grace period, and the grace period varies by employer, as well as the plan year-end date. Although the FSA grace period is for both healthcare and dependent-care FSAs, check with your company to learn about your options.
How Much Should I Put in a Flexible Spending Account?
Each new plan year, owners allocate a certain pre-tax amount for contribution to their healthcare expense account each month, with a maximum contribution of $2,750 per year for individuals. If you have FSA funds remaining at the end of the plan year, employers can allow owners to bring forward up to $500 of healthcare FSA funds to spend at the start of the new plan year. Potentially, $3,250 could be your contribution in FSA funds in a year if you roll over the maximum amount. This option only applies to healthcare expenses, not dependent-care. For the FSA grace period and rollover, your employer can have either or neither, but not both.
Benefits and Detriments of Flexible Spending Accounts (FSA)
Your FSA funds can be used to settle bills for dependents and spouses as well as pay certain authorized dental, pharmacy, vision, and medical expenses. The CARES (Coronavirus Aid, Relief, and Economic Security) Act, signed on March 27, 2020, now allows the use of FSA to pay for over-the-counter drugs, including those needed for quarantine and menstrual care, without a doctor’s prescription. Unfortunately, FSA funds cannot be used to pay for insurance premiums.
This is all you need to know about FSA accounts and how they help you take care of your medical bills. For extra peace of mind, work with a qualified health insurance agent to find the right coverage for your needs. If you are unsure about how to get started on your health insurance policy, talk to the professionals at Lou Aggetta Insurance Services in Pleasant Hill. Our experts are ready and waiting to help you determine your health insurance needs and explain how a policy can protect your finances. Give us a call today to get started!