Tax Savings with a Flexible Spending Account

by | Oct 22, 2021 | 2021, Family and Consumer Sciences, Money Management

Consider setting up a flexible spending account during your employer’s open enrollment period. Photo credit: Judy Corbus

Fall is open enrollment for health insurance and other employee benefits with many employers. One benefit available through many employers is a flexible spending account, or FSA. A flexible spending account is a special account into which you put money to pay for certain out-of-pocket health care expenses. You select the total amount you wish to contribute for the following year, and your contributions are divided out evenly over your paycheck schedule beginning January 1st.

A real perk to this account is you don’t pay taxes on your contributions – the money is deducted before taxes are calculated so you will save an amount equal to the taxes you would have paid on the money you have set aside.

The FSA funds can be used to pay for certain medical and dental expenses for you, your spouse if you’re married, and your dependents. Typical allowable expenses include:

  • Deductibles and co-payments
  • Prescription medications and over-the-counter medications with a doctor’s prescription
  • Medical supplies and equipment such as crutches, bandages, contact lenses and solution, hearing aid batteries, and blood sugar test kits.

Access to your funds varies by employer – some provide employees with a special debit card linked to their FSA to use to pay for expenses, while others require employees to submit a claim to the FSA for reimbursement.

You may contribute a maximum of $2,750 per year per employer. Your spouse also may contribute up to $2,750 in an FSA with their employer. Bear in mind that FSAs are “use it or lose it.” Funds generally must be used within the plan year; however, employers may offer a couple of options:

  • They may provide a “grace period” of up to 2 ½ extra months to use the funds.
  • They may allow you to carry over up to $550 per year to use in the following year.

Employers are not required to offer these options so it’s important to know your employer’s policy. If you have not used your money by the end of the plan year or grace period, you lose it so plan carefully.

To calculate how much to contribute, review this year’s medical expenses for routine doctor and dentist visit co-pays and charges, deductibles, prescription and OTC “maintenance” medications, and other medical expenses. If you anticipate an additional expense for the coming year, such as new eyeglasses, factor that in as well. It’s better to underestimate next year’s medical expenses and contribute a smaller amount than to overestimate and risk losing unused funds.

Some employers also offer dependent care flexible spending accounts to cover childcare expenses. They, too, offer tax savings and operate similarly to healthcare FSAs; check with your employer to see if they are available.

Use open enrollment to review your available options and premiums and compare with your current plan(s) to make sure you and your family are enrolled in the plan(s) that will best meet your needs at the most affordable price. Consider enrolling in a flexible spending account to save money on taxes – don’t leave money on the table!

For more information, visit IRS Publication 969 Health Savings Accounts and Other Tax-Favored Health Plans.

Source: HealthCare.gov

Judy Corbus
Latest posts by Judy Corbus (see all)