How to Make the Most of Your FSA Money Before It Disappears
Dec 22, 2023
Many workers take advantage of the
tax-free flexible-spending account to help pay for medical expenses, but time
is running out
The flexible-spending account, or FSA, is one of two common ways of
paying for healthcare expenses tax-free. With an
FSA, employees can deduct a certain amount of money from their paychecks
each year—the maximum was $3,050 in 2023—to cover expenses not paid by their
insurance such as doctor and prescription copays.
The
FSA is often confused with the second type of account with a similar acronym
called a health-savings account, or HSA, which is available only to people with
high-deductible health insurance plans.
The accounts are similar in purpose
but they have some key differences. To set up an FSA, for example, your
employer must offer it as part of their benefits package. But you can establish
an HSA on your own through a third-party provider if your employer doesn’t
offer it.
The most critical difference is
that money in an FSA typically must be spent within a year, whereas HSA money
can be spent anytime.
Below, we’ll explain how your FSA
works and how to make the most of it before your money expires.
Use the money—or lose it
The main benefit of setting up an
FSA is that it can save you several hundred dollars or more in tax payments
each year, depending on your tax bracket and how much money you decide to
deduct from your paycheck.
Under the typical FSA, however, you
forfeit to your employer any
money you haven’t spent by the end of the year, with some important
exceptions.
Even if you didn’t manage to spend
down all of your FSA funds as the new year approaches, you may still come out
ahead because of the tax savings you accrue from making pretax payroll
deductions, said Jake Spiegel, who studies health benefits at the
nonprofit Employee Benefit Research Institute.
But wait! You might
still have more time…
So it’s New Year’s Day and you
realize that you still have $500 in unspent FSA funds. Many employers allow
their workers 90 days after the year ends to file reimbursement claims for
medical expenses accrued in the previous year.
Look through your old receipts and
insurance claims. Was there a doctor’s visit where you forgot to use your FSA
debit card and paid cash to cover your copay?
You may still be able to get
reimbursed through your FSA if you file a claim quickly enough.
The Internal Revenue Service gives
employers two more big ways to help out workers who haven’t managed to spend
all their FSA funds.
Companies can extend the deadline
for spending FSA funds by 2½ months, during which all of the prior year’s
unused money can be spent on new medical expenses (not just old expenses as
described above).
The second option is to allow
workers to carry over a certain amount of their unspent money into their next
year’s FSA account. This year, eligible employees can carry over up to $610
into their 2024 FSA. The max increases to $640 next year, according to the
IRS.
Employers can offer a grace period
or allow workers to rollover money, but can’t do both. Check with your employer
to find out if either option is available to you.
What can you spend money
on?
The IRS has rules for what
you can buy with FSA funds, but your employer can narrow the list. If
you’re unsure if an expense is covered, check with your employer or FSA
administrator before you splurge.
Still, health-benefits experts have some pointers. Broccoli and
toothpaste may benefit your health overall, but that doesn’t mean you can use
your FSA to buy groceries, said Sarah Raaii, a health benefits attorney
with McDermott Will & Emery. The exception: items your employer allows
because a healthcare professional said they are medically necessary.
You
may want to keep receipts, because your employer may ask you for documentation
of eligible spending. If you bought something ineligible, you may have to
reimburse your FSA or you could lose tax savings for that amount, Raaii
said.
Do’s and Don’ts
Some
of the most common uses for an FSA is to cover copays for doctors’ visits or
prescription drugs. “But it’s well beyond copays,” said Nicky Brown, vice
president of public policy and government affairs at HealthEquity, which
administers employer FSA programs.
For
instance, FSA funds can be used to buy over-the-counter medications from
ibuprofen to acne creams without a prescription. Birth control pills, condoms
and menstrual-care
products such as tampons are also FSA-eligible.
Therapy,
weight-loss programs and gym memberships may also be paid for with your FSA,
according to the IRS.
Yet
there are plenty of things you can’t buy with an FSA account. Don’t try using
your FSA to pay for baby diapers, funeral expenses or cosmetic procedures such
as face-lifts, benefits experts said.
If you
are wondering if an item is FSA-eligible, consult this lengthy list posted on
HealthEquity’s website.
What to keep in mind for using an FSA going
forward
Here
are a few more tips from benefits experts to get the most of your FSA.
·
Plan ahead. The best way to avoid an
end-of-the-year scramble to spend down your FSA account is by accurately forecasting
how much you’re likely to spend in the coming year and set your paycheck
deduction amount accordingly. Go online and browse through your
health-insurance claims for the past 12 months and try to add up how much you
spent out-of-pocket. Are there any big one-time expenses you are expecting
soon, such as a surgery or other procedures? Thinking ahead can help ensure you
get the highest possible tax deduction without leaving money on the
table.
Source: Wall Street Journal