Key Takeaways
A Flexible Spending Account (FSA) allows you to contribute up to $3,200 into a tax-deductible savings account for out-of-pocket medical expenses and other care costs.
FSAs can be a great option for people whose low deductible health plan (LDHP) makes them ineligible for an HSA.
Many people don’t realize that FSAs can be used to help pay for childcare, daycare, and dependent care.
Last month’s post about Health Savings Accounts (HSAs) generated lots of feedback, including whether they can be used with their cousin, Flexible Spending Accounts (FSAs). Before answering that question, it’s important to understand what an FSA is.
An FSA is an employee benefit that allows you to set aside money, on a pre-tax basis (through an automatic payroll deduction), for certain health care and dependent care expenses. It’s important to know there are three types of FSA accounts:
1) Health Care FSA. This is the type most people are familiar with. A Healthcare FSA can be used for healthcare expenses, including co-pays and deductibles, medical products, prescriptions, vision, dental, and more.
2) Limited Expense Health Care FSA. Also known as a Limited Purpose FSA is used
exclusively for out-of-pocket dental and vision expenses. Due to its specific focus, this is the only type of FSA that permits contributions to an HSA. If your employer provides both options, it's beneficial to utilize each one, as the Limited Purpose FSA covers dental and vision costs, allowing you to reserve more money in your HSA for retirement. NOTE: You cannot submit the same expense for reimbursement from both accounts; you must choose only one.
3) Dependent Care FSA. This type of FSA helps dual-income parents pay for nannies,
Babysitters, daycare, preschool, summer day camp, and before-school and after-school care for children under the age of thirteen. Many people don’t realize a Dependent Care FSA can also be used to help pay for adult daycare for a spouse, parent, or other relative who is physically or mentally disabled. Also, the annual limitations for a Dependent Care FSA are higher than for a Health Care FSA - $5,000 in 2024. NOTE: The dependents for whom you are paying for care must live with you at least most of the time. If you and your spouse are divorced, only the parent who is the primary caregiver can contribute to a Dependent Care FSA.
FSA VS. HSA
It’s important to remember that all three types of FSAs are “use-it-or-lose-it” during the Calendar year. Money left over in your FSA generally cannot be rolled over to the following year, unlike an HSA that stays with you until the balance is drawn down. However, employers can give employees a grace period to use the funds into the next year (generally two to three months) or to carry over up to $640 into the next year (but they can’t offer both).Also, note that contributions to your own FSA are limited to $3,200 a year. That’s less than the annual limit for an HSA ($4,150 single and $8,300 family). But that doesn’t mean you should automatically ignore an FSA, especially since it’s tax-deductible like an HSA. Also, FSAs can be a great option for the many people who don’t qualify for their employer’s HSA because they don’t have a high deductible health plan (HDHP).
What If My Employer Doesn’t Offer An FSA?
If you’re retired, self-employed, or your employer doesn’t offer an FSA, you cannot participate in an FSA unless your spouse has an FSA through their employer.
Can I Enroll In Both: A Health Care FSA And An HSA If My Employer Offers Both Options? Generally, no. If you are covered under your healthcare plan and your spouse is covered under theirs, you cannot contribute to an FSA if your spouse also contributes to an HSA within the same year. This rule often leads to confusion.
FSA Considerations
The biggest challenge with an FSA is estimating how much out-of-pocket medical expenses you’re likely to incur over the year. This includes co-pays for annual physicals, dental checkups, eye exams, planned major surgeries, and annual prescriptions you pay out of pocket. These costs are notoriously hard to predict. So, the effort may not always justify the outcome. However, if you have a sizable balance in your FSA towards the end of the year, there’s still hope! You can find a database of FSA-eligible items through the FSA Store.
Conclusion
If you or someone close to you has questions about tax-smart saving for healthcare and dependent care expenses, please don’t hesitate to reach out. We’ve helped many clients like you in similar situations.
RYAN A. DUNN, CFP®, is a Wealth Manager at Novi Wealth
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