A Flexible Spending Account (FSA) is a type of savings account that allows employees to contribute a portion of their earnings to pay for qualified health care expenses. An FSA is most often used as a supplement to a group health care plan to pay for expenses with pre-tax money.
An FSA can be used to pay for eligible health care, vision and dental expenses for yourself, your spouse, or eligible dependents. Money contributed to the account is deducted from your paycheck and is not subject to income or payroll taxes.
The 2022 contribution limit is $2,850. So, for example, someone earning $60,000 that elects to set aside the full contribution would only be taxed on $57,150, saving more than $600 in federal income taxes.
With an FSA, the money comes out of your paycheck, before taxes, in regular increments. However, these accounts are typically “pre-funded” by the employer, meaning the full contribution amount is available to spend at the beginning of the year. One caveat: If you leave your job in the middle of the year, you may have to pay back money that has been spent but has not yet come out of your paycheck.
An FSA is owned by the employer, and you forfeit any unused balance unless the employer allows a carryover, which is capped at $570 for 2022. Alternatively, an employer may, but is not required to, offer a grace period of up to 2.5 months into the next year in which to use leftover money. A carryover and a grace period cannot both be offered.
FSAs follow the same rules of your health plan. In other words, you can only enroll in an FSA as either a new hire, during the open enrollment period, or if there is a qualified event (marriage, divorce, or birth of a child, to name a few).
All benefit-eligible employees may enroll in an FSA, even if they are not enrolled in a group medical plan.
You may be surprised: Hundreds of products, like breast pumps, eye exams and eyeglasses, chiropractor visits, dental treatments, sunscreen, smoking cessation courses, and first aid supplies. A comprehensive list of what’s eligible can be found at the FSA Store.
A Limited Purpose FSA can be used only for dental and vision expenses.
Tax advantages:
Two other types of FSAs are used for specific purposes:
Note: Neither a DCFSA nor a Commuter FSA may be used for health care expenses.
Interested in other ways to save money for health expenses? How Does an FSA Differ From an HSA?
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