Our friends at Investopedia offer some great information about Flexible Spending Accounts.
What Is a Flexible Spending Account (FSA)?
A flexible spending account (FSA) is a type of savings account that provides the account holder with specific tax advantages. An FSA is sometimes called a “flexible spending arrangement” and can be established by an employer for employees. The account allows you to contribute a portion of your regular earnings; employers also can contribute to employees’ accounts. Distributions from the account must be used to reimburse the employee for qualified expenses related to medical and dental services.
Another type of FSA is a dependent-care flexible spending account, which is used to pay for childcare expenses for children age 12 and under and can also be used to pay for the care of qualifying adults, including a spouse, who cannot care for themselves and meet specific Internal Revenue Service (IRS) guidelines. A dependent-care FSA has different maximum contribution rules than a medical-related flexible spending account.
How a Flexible Spending Account (FSA) Works
One of the key benefits of a flexible spending account is that the funds contributed to the account are deducted from your earnings before taxes, lowering your taxable income. As a result, regular contributions to an FSA can reduce your annual tax liability.
The IRS limits how much can be contributed to an FSA account per year. For medical expense FSA accounts, the annual contribution limit per employee is $2,750 for 2021 and $2,850 for 2022.
If you are married, your spouse can also put aside up to the annual contribution limit through their employer. Employers can choose to contribute to an FSA, but they do not have to—if they do, their contribution does not reduce the amount that you are permitted to contribute. You are not taxed on employer contributions.
For 2021, the contribution limit for a dependent-care FSA is $10,500 for joint and individual tax returns and $5,250 for married taxpayers filing separately—an increase given through the American Rescue Plan of 2021. For 2022, the contribution limit returns to $5,000 for joint and individual tax returns and $2,500 for married taxpayers filing separately.
The funds from an FSA can be used to reimburse payments for medical care, which is defined to include amounts paid for the diagnoses, cure, mitigation, treatment, or prevention of disease or ailments affecting any structure of the body. However, expenses for surgery for cosmetic purposes and for items or services that are just beneficial for general health, such as gym memberships, are not reimbursable. Qualified medical expenses for FSA owners, their spouses, and dependents are covered.
Medical equipment purchases, such as diagnostic devices, bandages, and crutches, are covered by FSAs. Expenditures for prescription medications, including over-the-counter (OTC) drugs for which you had a prescription, as well as insulin can be reimbursed with FSA funds.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act enacted in 2020 expanded reimbursable qualified medical expenses for 2020 and later years to include the cost of over-the-counter drugs without a doctor’s prescription. The act also permitted the use of FSA funds to reimburse the costs of menstrual care products. Both of these CARES provisions are permanent.
Funds in an FSA may also be used to reimburse amounts paid in accordance with insurance plan deductibles and co-payments for medical services. Unfortunately, the money may not be used to pay for insurance premiums.
Your circumstances may be different than those mentioned here. Give us a call to discuss how an FSA can help you.
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. Longleaf Wealth Management Group, LLC and LPL Financial are separate entities