Why you might want a flexible spending account
Many people might not know exactly what a flexible spending account (FSA) is or how it works, so here are some basics.
What is a flexible spending account?
An FSA is an account that employers offer that can help you save on taxes when you pay for qualified expenses. There are two types you might be interested in:
- Healthcare FSA
A healthcare FSA can be used to pay for qualified medical, pharmacy, dental and vision expenses. The IRS determines which expenses qualify in Publication 502. But they typically include many things such as eye exams, glasses, dental treatment, prescribed birth control, medications, mental health visits, chiropractic care and co-pays, among others. As of 2022, over-the-counter drugs have been permanently reinstated as eligible for reimbursement under an FSA.
- Dependent Care FSA
A dependent care FSA can be used to pay for qualified expenses so that you can work, or your spouse or partner can work, go to school or look for work. The IRS determines which expenses qualify in Publication 503. But they typically include expenses for children under age 13 like day care, preschool, day camp, nanny and housekeeper costs, among others.
Here’s how FSAs Work
You can sign up for a State of Florida FSA once a year during the open enrollment period. As part of signing up, you’ll estimate your expenses for healthcare or dependent care (or both) and decide on the total amount you want to contribute for the upcoming year.
That amount will be deducted from your paycheck before taxes throughout the year and deposited into your FSA. Deductions are taken the first two paychecks of each month for 12-month employees; summer earnings for 9-month faculty are not included. Because the money comes from pre-tax dollars, there are significant savings over paying for these expenses out of your checking account.
For 2022, the maximum the IRS allows you to contribute to a Healthcare FSA is $2,750 and $5,000 into a Dependent Care FSA. Whatever amount you elect to save in an FSA, it will be deducted from your check each payday throughout the year. But you needn’t wait for it to build up so you can use it. For the Healthcare FSA, you have access to the full amount you decided to contribute right away. So even though you contribute the money all year, you can access the total amount right from the start if you need to. For the Dependent Care FSA, you will have access to what you have contributed.
The money you put into an FSA is also tax deductible, meaning you can deduct what you contribute to your FSA on your taxes, saving you even more.
The State of Florida’s healthcare FSA comes with a credit card for accessing the money in your account, or you can use your own money and submit receipts for reimbursement.
FSAs do have a few drawbacks in that they are often “use it or lose it” funds. However, you can carry over up to $550 into the new year from your healthcare FSA. Be sure to read your plan’s fine print for details of what happens at year’s end.
Many people simply use up their balance on some qualified expenses or rollover the allowable amount.
Overall, FSAs are a good bet for employees. You save on taxes and reduce taxable income; you have access to the year’s contribution right from the start so you can plan for a large medical, dental or childcare expense, or use the money throughout the year when you need it most.
Visit the UFHR Benefits’ website for more information.