Flexible spending accounts (FSAs) are associated with health plans which come through a job. This structure allows you to pay for deductibles, copayments, some prescriptions, and other healthcare-related costs by taking money before taxes to divert it into this particular account. That allows you to pay for some out-of-pocket expenses without worrying about the taxes on the amount you spend.
This option is different than a health savings account in several ways. FSAs require the money to be spent by a specific deadline, otherwise you’ll lose the amount that was diverted. You are limited to the amount that is diverted into this account. Some employers do match funds contributed to an FSA, but that is not a universal benefit offered by employers today.
You can use the funds for some, but not all, of the costs. You can receive reimbursements from your FSA for insulin, for example, without a prescription, but you can’t use them to buy over-the-counter medicine unless you obtain one from your doctor.
If you’re thinking about this option for yourself or your family, then here are the pros and cons of flexible spending accounts to review.
List of the Pros of Flexible Spending Accounts
1. The money moved into an FSA happens before taxation.
The funds you use for this special account are not subject to taxes. That means you’ll be paying for the qualifying expenses from your flexible spending account while saving on the taxes which would usually be paid. With the caps at $2,650 per employer in 2018, that means the average person saves about $200 on their final tax bill at the end of the year. If you live in a state which has an income tax, you’ll save a little more than that.
2. There are multiple types of FSAs to consider through your employer.
There are currently three different types of flexible spending accounts offered by employers in the United States. Each of these provides the same pre-tax benefits, allowing you to spend tax-free income on regular expenses permitted by the plan.
• The healthcare FSA allows you to save up to 30% on allowed costs when you or a qualifying spouse or dependent requires care. Allowed expenses in this flexible spending account including vision, dental, and medical fees which are not covered by insurance.
• Limited expense healthcare FSAs still provide vision and dental care expense qualifications, but they limit medical expense qualifications. You must be enrolled in a high-deductible plan and have a health savings account to use this option. If your spouse has this type of healthcare coverage with an HSA, then you can still have this FSA even though your insurance is different.
• Dependent care FSAs allow employees to pay for allowable care services for their dependents. Parents use this option to pay for after-school programs, daycare, and preschool. The funds from this flexible spending account cannot be used to pay for the healthcare expenses of a child.
3. You have financial coverage for items not always covered by insurance.
The benefit of flexible spending accounts for healthcare coverage is that you have a way to cover any auxiliary care requirements which may be necessary over the course of a year. Your insurance might not cover things like over-the-counter prescriptions, vaccines for travel, or specific diagnostic tests. Some costs require reimbursement, like the purchase of frames for corrective glasses. These items can be paid through your FSA under most circumstances.
4. The healthcare FSA benefits apply to everyone in your family.
Unlike other healthcare coverage benefits, your flexible spending account covers everyone in your immediate family. Thanks to the provisions of the Affordable Care Act, that includes any adult children up through the age of 26. Your spouse and young dependents also generate qualifying expenses through the current setup of the FSA system. Although you must be able to claim these individuals on your tax return (parents who split custody would need to speak with their plan administrator), this is a simple way to make the money you earn go a little further.
5. You have access to the funds from an FSA immediately.
When you decide to take advantage of the benefits offered by flexible spending accounts, then the money is taken out of your paycheck throughout the year. That funding splits up the contribution into monthly payments which are easy to manage. Most people don’t notice the difference in their paycheck. Some workers even see higher take-home pay when they use their FSA.
Even though the funds are taken out with each check, you have full access to the total amount for the year during the first day of the plan. If you have a qualifying expense in January, then the entire amount can be utilized immediately, reducing the need to go into debt or set up a payment plan to handle this financial responsibility.
6. Most FSAs use a debit card for easy access to your benefit.
Most flexible spending accounts connect the funds available to you through a debit card you can use at qualifying providers. Just hand over the card as you would for any other form of payment, then the provider will run the transaction as they would a credit or debit purchase. Although this benefit doesn’t help individuals using a vendor (like a preschool) who don’t accept credit card payments, it does make things easier when trying to pay for healthcare expenses.
7. The FSA covers some alternative therapies as part of the benefit.
There are several different treatments, benefits, and costs which are listed as a qualifying expense through today’s flexible spending accounts. FSA money can be used for acupuncture treatments, dental implants, and even supplements if you receive a prescription from your doctor. You can also enter a stop smoking program or even pay for a new TV or computer if it comes with a qualifying hearing device and you have that prescription from your doctor. Even weight loss programs offer some deductible expenses, including the cost of special foods which go beyond the “price of a normal diet.”
8. You don’t pay back any excess FSA funds used for the year.
If you use your entire benefit from your flexible spending account, then quit or get fired from your job, then there’s no requirement to pay back the extra amount you spent. Let’s say that you get injured in February and spend the full capped amount. You’ve only contributed $250 at this point. The remainder of those funds, over $2,000, become a financial hit to the employer in this scenario. Not only are you not asked to pay it back, but it also doesn’t count as taxable income for you at the end of the tax year.
9. Elective treatments qualify under FSA rules.
Depending on the flexible spending account plan of your employer, there are some elective treatments which qualify if they have a medical necessity to them at some level. The most common treatment which falls under this category is chiropractic care. If you’re coming to the end of a plan year and there has been a surgery or therapy you’ve been putting off, this structure gives you a way to get the care you need without a significant shock to your checking account.
List of the Cons of Flexible Spending Accounts
1. You can only save a limited amount of your income in an FSA.
The current rules governing flexible spending accounts in the United States restrict the amount you can save in them to $2,650 per employer. If you work two jobs that offer this benefit, then you do have the option to keep that money twice. Spouses can put this amount in an FSA with their employer as well. If you need to save more for your healthcare expenses than this amount, then you’ll need to look at other options to ensure that you can maximize your total savings.
2. You must use the money in an FSA within the plan year.
Most people must use the money they saved in their flexible spending accounts before the end of their plan year. Failing to use the funds will cause them to be lost, which means you could forfeit all of the $2,650 if you don’t have any qualifying expenses. The money leftover in your FSA goes back to your employer, who can use it to offset the cost of administering benefits.
You may have access to a grace period of up to 75 days to use the money in your flexible spending account under the guidelines of some plans. Some offer an option to carry up to $500 from one year to the next if you don’t spend it all. Employers can offer one option, but not both, and it is not mandatory.
3. You could lose your child care tax credit.
One of the unique benefits of flexible spending accounts is that they allow for childcare expenses to be deducted from the funds. That makes it possible to pay for these expenses with tax-free funds. The hidden disadvantage of doing so is that it changes the profile of your annual tax return. Because the money you spent wasn’t taxed, you’re not permitted under most circumstances to claim the credit available on your return. If this circumstance isn’t realized, then an expected refund at the end of the year might be smaller – or you might find yourself paying more.
The same issue applies to any medical expenses that your cover with the flexible spending account. You are not allowed to deduct any of these costs when you file your annual tax return with the IRS.
4. The benefits disappear if you lose your job.
The availability of funds offered through flexible spending accounts is directly tied to your employer. That means you will lose benefit access if you end up losing your job for any reason. Even if you’re laid off through no fault of your own, the yearly benefit disappears for you. That means you would lose contributions you made to the FSA after job termination, even if you didn’t access the money for a qualifying expense before losing your position.
5. FSAs are offered during limited enrollment periods only.
Most flexible spending accounts have a 30-day enrollment period through your employer. That is in addition to the initial enrollment period available to new employees as part of their orientation process. If you miss the deadline for this benefit, then you don’t get another chance to enroll until the next open period. The only exception to this rule is if you have a qualifying life event after the deadline passes, such as getting married, having a child with your partner, or finalizing an adoption.
6. Foster families do not receive the same benefits.
Unless a foster family can claim the children under their care as a dependent, then the money available through the flexible spending account cannot be spent on their needs. You would need to adopt the children under your care to create a qualifying life event for coverage. Although you’d still have access to other benefits, including Medicare and Medicaid, there are some expenses not covered by these programs which you would still face.
7. FSAs do not permit you to change your contribution amount.
The contribution you put in the paperwork during the qualifying enrollment period becomes what gets taken out of your paycheck each month. If you have an unexpected expense and could use the extra money, there’s no way for you to change this structure. You cannot change how much gets taken out of your check until you reach the next enrollment period or experience a qualifying life event.
8. Employers must meet the at-risk provision of FSAs when they’re offered.
Most employers like the idea of flexible spending accounts except for one thing: the at-risk provision. This rule requires the employer to offer coverage for a qualifying expense up to the full amount elected by the employee to set aside for the year. Regardless of how much was contributed to that final tally for the year, they have access to the full elected amount. If several employees all spend money on qualifying expenses early in the year, it could take the remaining 11 months to make up the difference.
These pros and cons of flexible spending accounts show why putting some money away for healthcare expenses is beneficial. The potential disadvantages offer legitimate reasons why an FSA might not be the right choice for some individuals or families. If you have a high-deductible plan which qualifies for a health savings account, that might be a more important priority. For other plans, this option could help to reduce your financial liabilities for ongoing care.
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