A Flexible Spending Account (FSA) is a tax-favored program offered by employers that allows their employees to pay for eligible out-of-pocket health care and dependent care expenses with pre-tax dollars. By using pre-tax dollars to pay for eligible health care and dependent care expenses, an FSA gives you an immediate discount on these expenses that equals the taxes you would otherwise pay on that money.
In other words, with an FSA, you can both reduce your taxes and get more for your money by saving from 20% to more than 40% from what you would normally pay for out-of-pocket health care and dependent care expenseswith after-tax (as opposed to taxed) dollars.
Your participation in any FSA is completely voluntary,and it’s important to remember that unlike other Federal benefits, your FSA election is only effective for one Benefit Period. In other words, you must enroll each year that you choose to participate. If you do not enroll during Open Enrollment in November and December each year, you will not be able to participate in the next Benefit Period, unless you experience a Qualifying Life Event that allows you to make an election outside of Open Enrollment.
The most common type of FSA is used to pay for medical, vision and dental expenses not paid for by insurance, usually deductibles, copayments, and coinsurance for the employee’s health plan. Over-the-counter medical devices, such as bandages, crutches, and eyeglass repair kits are allowable. Generally, allowable items are the same as those allowable for the medical tax deduction, as outlined in IRS publication 502.
Some employers choose to issue a debit card to their employees who participate in the FSA. Participants may use the debit card to pay for their FSA-eligible expenses at the point of sale. Pharmacies and grocery stores who choose to accept the debit card as payment must disallow transactions at point of sale if the participant attempts to pay for items that are not eligible under an FSA. In addition, employers still must require employees to provide itemized receipts for all expenses charged to the debit card.
The key in budgeting and using the FSA account is unless you employer approves carrying monies forward into the next year, these pretax dollars must be spent in the current calendar year.So as the year comes to a close, if you have monies left in your account, consider purchasing a new pair of eye glasses or some other type of approved medical deduction so you don’t lose monies you’ve put into your account.