Details about the healthcare Flexible Spending Account
A Flexible Spending Account (FSA) is a great way to reduce your healthcare costs and make budgeting easier. When you set up an FSA, your employer takes money out of your paycheck before taxes. Then you draw on the funds during the plan year to pay for qualified expenses. Make sure to set aside only as much as you’ll use – with an FSA, you typically can only use the money for expenses during the current plan year. The FSA grace period, which allows extended access to FSA funds, is available to some employers.Your employer determines what types of expenses are qualified, within guidelines defined by the Internal Revenue Service (IRS). Most employers’ plans cover:
- Medical expenses like deductibles and copayments
- Out-of-pocket prescription costs
- Dental expenses
- Vision services
When you have money in your FSA, you have peace of mind knowing you can cover healthcare expenses when they come up. And budgeting is easier because you’re paying a little with each paycheck, instead of paying a lot of money at one time. Plus, you have access to the full annual amount of your healthcare FSA – even money that hasn’t been deducted from your paycheck yet – on the first day of the plan year.
Some employers also offer a separate FSA for qualified dependent care expenses, such as childcare or adult day care for a dependent who is under the age of 13 or disabled. You can set up a healthcare account, a dependent care account, or both types, depending on your situation.
The FSA may sound a little like a Health Savings Account (HSA). Even though both are tax-free accounts for healthcare expenses, they differ in several important ways. You can have both an HSA and FSA, but only if the FSA is a "limited" account for vision, dental, and preventive care expenses.
Tax savings example
Sure, your paycheck might look smaller when you have an FSA – but if you use all your FSA funds, you get that money back. Remember: you’re using your FSA to pay for something you’d buy anyway. Instead of using your take-home pay – money the IRS has already taken a cut of – you’re spending money the government hasn’t touched. So, for example, if your tax rate is 28 percent, you’re getting 28 percent more stuff for the same amount of money.
Here's an example ...
Last year, Laura made $28,000 and put $1,500 in her healthcare FSA. The example below shows how much she saved by using the pre-tax money for qualified health expenses. Without an FSA, she would have paid for these expenses from her take-home pay, which she paid taxes on.
| Example of annual tax savings* | With FSA | Without FSA |
|---|---|---|
| Laura’s taxable income | $28,000 | $28,000 |
| Pre-tax money deposited into her FSA | -1,500 | -0 |
| Laura’s remaining taxable income | 26,500 | 28,000 |
| Minus federal and Social Security taxes | -9,447 | -9,982 |
| Take-home pay spent on qualified expenses | -0 | -1,500 |
| Laura’s remaining take-home pay | $17,053 | $16,518 |
Putting pre-tax money in an FSA saves Laura $535 on her federal tax bill – plus she’ll save on state taxes as well. * This example is intended to demonstrate a typical tax savings based on 28 percent federal and 7.65 percent FICA taxes. Actual savings will vary based on your tax situation.