If you have already started the process of setting up an FSA or are just not sure about them yet, here are some of frequently asked questions that may help clear anything up.
Flexible Spending Account Frequently Asked Questions
I am not a tax professional, or legal counsel, so please consult with your advisor before acting on any tax advice.
1)What is a flexible spending account(FSA)?
A flexible spending account is a voluntary plan that provides the opportunity to convert part of your salary into tax-free benefits.
The spending account will allow you to set aside pre-tax dollars from your paychecks to cover eligible health care expenses for medical, dental, vision and more.
2)If I put part of my salary into a FSA, won’t I make less money?
Your spendable income may actually increase by using an FSA. Lets look at an example.
Taxable income of $50,000
FSA Contribution: $0
Subtract Federal and Social Security Taxes: $13,697
Health expenses: $2,000
Spendable income: $34,303
Taxable income of $50,000
FSA Contribution: $2,000
Taxable income is now: $48,000
Subtract Federal and Social Security Taxes: $12,983
Spendable income: $35,017
SAVINGS of $714
****This is just an example of typical tax savings. Actual results may differ depending on your exact situation.
3)Why should I bother with the FSA when I can just take a deduction on my medical expenses on my tax return?
Medical expenses have to exceed 7.5% of your Adjusted Gross Income to be deducted on your tax form. FSA’s do not have to exceed that level. If your AGI is $50,000, than your expenses have to exceed $3750.
***As mentioned above, speak to your accountant to see how this will impact your overall situation.
4)Does a flexible spending account replace my existing insurance plan?
No, the FSA is meant to supplement those plans and provide a way for you to pay for any uncovered expenses on a pre-tax basis.
Always submit your claims to your primary insurance carrier and any out of pocket costs you may be paid for by your FSA.
5) Does that mean the FSA will pay my doctors for me?
No, you will have your own checkbook or debit card and you will need to make payment to the provider.
6) Are expenses that I paid with my FSA deductible on my tax return?
No, you get a deduction for what you deposit into the account so you cannot deduct it again.
7)How long is the FSA in effect for?
FSA’s will run calendar year and you must enroll every year and decide how much you will contribute to the plan. Your contributions generally cannot be changed during the year except in the instances below.
In the event of divorce or death of a spouse, you have the option to change your contribution at that time also.
8)What if I don’t spend all the money in the account? Can I use it next year?
No, unfortunately any unused money does not rollover into the next year. For this reason, you must be careful not to put too much into the account so you don’t waste any money.
9)I have unused money in my account. Where did it go?
If you did not spend your money before the end of the plan year, the money gets forfeited to your employer and is under strict regulation by the IRS.
10) What else am I missing?
In addition to the use it or lose it rule, keep in mind that since your contributions are going in pre-tax, your future social security benefits may be affected.
11)Exactly what expenses can I reimburse myself for?
The IRS has a nice guide on FSA’s and what is eligible. I recommend reading through the guide. Additionally, they have removed some expenses from the eligibility list like over the counter prescriptions.
Publication 502 Medical and Dental Expenses
Publication 969 Health Savings Acccounts and Other Tax-Favored Health Plans
The list below was taken from Publication 502 and will link directly the the IRS webiste.
- Annual Physical Examination
- Artificial Limb
- Artificial Teeth
- Birth Control Pills
- Body Scan
- Braille Books and Magazines
- Breast Pumps and Supplies
- Breast Reconstruction Surgery
- Capital Expenses
- Christian Science Practitioner
- Contact Lenses
- Dental Treatment
- Diagnostic Devices
- Disabled Dependent Care Expenses
- Drug Addiction
- Eye Surgery
- Fertility Enhancement
- Founder’s Fee
- Guide Dog or Other Service Animal
- Health Institute
- Health Maintenance Organization (HMO)
- Hearing Aids
- Home Care
- Home Improvements
- Hospital Services
- Insurance Premiums
- Intellectually and Developmentally Disabled, Special Home for
- Laboratory Fees
- Lactation Expenses
- Lead-Based Paint Removal
- Learning Disability
- Legal Fees
- Lifetime Care—Advance Payments
- Long-Term Care
- Medical Conferences
- Medical Information Plan
- Nursing Home
- Nursing Services
- Organ Donors
- Physical Examination
- Pregnancy Test Kit
- Psychiatric Care
- Special Education
- Stop-Smoking Programs
- Vision Correction Surgery
- Weight-Loss Program