FSA Account

What is FSA account

A Flexible Spending Account (FSA, also called a “flexible spending arrangement”) is a tax-advantaged healthcare account (Set up by an employer as an employment benefit) where an employee saves pre-taxed income that is to be used to reimburse qualified out-of-pocket healthcare and dependent care expenses.

Certain out-of-pocket expenses include;

• Copayments,
• deductibles,
• Coinsurance,
• Certain Drugs and
• Certain healthcare costs

 Salient features of FSAs are:

• The account is Established and owned by the Employer and hence not administered by your health insurance
• IRS limits Contributions by both employer and employee
• FSAs are “use it or lose it” accounts; the employer retains the unused funds at the end of the year

Unused funds go back to the employer unless they choose to:

• Agree to cover expenses of up to 2 ½ extra months of the previous year into the current year. Or;
• carry over up to $610($510 in 2022) from the previous year to the current year

Please note that the Employer’s contributions to your FSA are not mandatory.

Types of FSA

Health care FSA

Health Care FSA (HCFSA) is also known as the Medical FSA. It’s only available to employees receiving healthcare coverage through their employer unless covered under a High Deductible Health Plan (HDHP) with a Health Savings Account (HSA). It pays only for IRS-approved expenses. These Certain out-of-pocket expenses include;

• Medical,
• Pharmacy,
• Dental and vision.

Employers do sometimes offer Post-deductible health FSA which dictates that you must meet the plan’s deductible before accessing the FSA.

FSA account dependent care

Dependent Care FSA (DCFSA) is an account that helps in paying off eligible dependent care expenses. It’s available to any worker who is not temporary, seasonal, or intermittent.  It ensures your dependents are taken care of so;

• You can continue working
• Somebody under your plan e.g. your spouse, can search for employment or go to school

As per IRS definitions, Dependents include children under age 13 and adults who are mentally or physically handicapped.

Limited Purpose FSA

Limited Purpose Flexible Spending Account (LPFSA) is available to employees receiving healthcare coverage through their employer, even if they have an HDHP with a HAS. This account is only available to cover specified expenses i.e. vision and dental expenses only.

How does FSA account work

Open Enrollment

Employees usually sign up for this once a year during Open Enrollment. When signing up, please consider:

• Estimated expenses for the upcoming year to guide on amounts the chosen amount
• If an employer is contributing to the FSA

Based on the above, please decide on the total funds to be put in the FSA (annual election limit).

Annual Election limit

The chosen amount above is spread over the number of checks for the year.  Monthly Payments will then be effected at the paycheck level hence savings on the tax.

The annual election amount cannot be adjusted unless the employee has a qualifying event.

Use of funds

Payments for qualified expenses are made using:

• An FSA debit or credit card to  pay for expenses on the go
• Other payment means like own credit card. The receipts are then submitted for reimbursement

Reimbursements

Claims are submitted through the employer with proof of the medical expense and a statement showing that it’s not covered by your plan. After this, reimbursement for your expenses.

Please take note that Expenses that occur before the FSA plan year are not eligible for claims.

FSA account benefits

Convenience

If your employer offers a payment card for FSAs, you have convenience!

This card can be used to pay for eligible expenses at specified pharmacies, physicians, dentists, online, and at physical stores.

Cards automatically create an activity history for quick reference and enable automatic claims.

Tax-free purchases

Allows tax-free payments for prescriptions (including some OTC medicines), copays, deductibles, and coinsurance.

You can easily save upwards of 30 percent on dependent care services

Pretax Contributions

Contributions to FSAs are deducted from your earnings before taxes hence lowering the taxable income. As a result, regular contributions to an FSA reduces your annual tax liability.

IRS rules for FSA

IRS FSA limit

2023 FSA limit

Please note

• If only one of the couples has an FSA, you cannot double your contributions (e.g. put $6,100 into one account).
• Workers can elect to contribute up to the IRS limit and still receive this employer contribution on top of those amounts.
• An employer may match up to $500, regardless of whether or not the employee contributes to a health FSA themselves.
• Above $500, employers may only contribute a dollar-for-dollar match to the employee’s contribution.

2022 FSA limit

Please note

• If only one of the couples has an FSA, you cannot double your contributions (e.g. put $5,700 into one account).
• Workers can elect to contribute up to the IRS limit and still receive this employer contribution on top of those amounts.
• An employer may match up to $500, regardless of whether or not the employee contributes to a health FSA themselves.
• Above $500, employers may only contribute a dollar-for-dollar match to the employee’s contribution.

FSA limits 2021

Please note

• If only one of the couples has an FSA, you cannot double your contributions (e.g. put $5,500 into one account).
• Workers can elect to contribute up to the IRS limit and still receive this employer contribution on top of those amounts.
• An employer may match up to $500, regardless of whether or not the employee contributes to a health FSA themselves.
• Above $500, employers may only contribute a dollar-for-dollar match to the employee’s contribution.

Who is eligible for an FSA account

Does FSA rollover

Unused funds are forfeited back to the employer unless the employer offers options:

• Agree to cover expenses of up to two and half months of the previous year into the current year. Or;
• carry over up to $610 from the 2022 year to 2023($570 from 2021 to 2022)

Double-dipping not allowed

IRS will not allow claiming of reimbursement and a deduction from tax returns for the same expense.

IRS regulations do not allow commingling between accounts i.e. Health Care FSA monies may only be used for health care expenses and your Dependent Care FSA may only for dependent care expenses.

FSA to HSA

IRS allows individuals with both types of accounts a one-time, tax-free transfer of funds from the FSA (via limited purpose or post-deductible FSA) to a HAS. This is allowable as long as the individual remains eligible for an HSA for a year after the transfer.

IRS does not allow the movement of funds from an HSA to a new FSA and vice versa. However, should you enroll in an FSA, you are allowed to keep the HAS (But further contributions are disqualified).

If you choose to open an HSA account in the next year while still subscribed to the FSA please watch out for the grace period or carryover time pitfall.

This can be avoided by Spending the entire Health FSA funds to zero balance before the start of the grace period (before the end of plans 12 months). This ensures immediate eligibility at the end of the plan.

But…

Should a single penny fall into the grace period, you will be ineligible until after the grace period ends (three full months after the plan year ends). Technically, ineligibility means you can’t contribute or get reimbursements from the HSA until after the grace period.

FSA with HSA

This option is available only if limited-purpose FSA is paired with HSA. Why have both accounts? You can maximize tax savings associated with both accounts while;

• Using limited-purpose FSA can be used to cover certain dental and vision care expenses and short-term, and;
• Use the HSA to cover broader health care costs in the long term.

Bottom Line

Remember;

• Your FSA account can save you around 30% on healthcare costs. Don’t count contributions to an FSA as a deduction on your salary—instead of the 30% as money added to your wallet.
• This account can be utilized for expenses of your own yourself, your partner, or any dependents on your tax return. Any adult child below 26 or younger on Dec. 31 can benefit under your health insurance plan.
• You should carefully weigh the amounts you plan you plan to put into your account in light of how you intend to spend over the year else you risk forfeiture forfeit if the plan doesn’t offer the option of a rollover.