What is an FSA? Your guide to flexible spending accounts
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If you are looking to save money on your medical expenses, you might consider opening a flexible expense account (FSA). With an FSA, individuals can use pre-tax money for a number of expenses that your medical or dental insurance does not cover, including co-pay and coinsurance, as well as some health care needs like prescriptions and some additional fees. over-the-counter drugs, feminine hygiene products, contact lenses and glasses. Sites like FSA store and Amazon Highlight FSA-eligible products, from facial cleanser to pain relievers.
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A big problem with an FSA is that it is an employer sponsored plan, so you can only create one if it is offered by the company you work for. You can usually only register during the open registration period and contribution rules vary by employer.
Below, Select walks readers through everything they need to know about an FSA.
The main benefit of using an FSA is that you can set aside pre-tax dollars for medical bills, which can help save you money. For example, if you owe 30% state and federal income taxes and contribute $ 1,000 to your FSA, you save $ 300 by putting that money into an FSA and using it for doctor bills or prescription drugs.
By contributing to an FSA, you also reduce your taxable income, which in turn decreases the amount you and your employer owe in payroll taxes. Payroll taxes are money that employers and employees pay to fund Medicare and Social Security programs.
- In 2021, the social levy is 6.2% for the first $ 142,800 of income
- Medicare tax is 1.45% on all your income, and if you earn more than $ 200,000, you pay an additional 0.9%.
- For people earning less than $ 142,800, the combined tax rate is 7.65%.
If you earn $ 100,000 and contribute $ 2,000 to an FSA, you will save $ 153 in payroll taxes. There are in line calculators available to help you calculate how much money you will save in taxes by contributing to your FSA.
How much can you contribute to an FSA?
A person can contribute up to $ 2,750 per year through their employer. If you are married and your spouse has an FSA through their employer, they can also contribute $ 2,750.
There are a few rules that you must follow in order to take advantage of an FSA. Individuals must use the money they put in the account within one year or risk losing it. You can generally only carry over $ 550 from your account each year. The maximum amount you can contribute to the following year does not change if you choose to carry over money from the previous year.
Rollover rules are set by employers, so you should check with yours to see if you need to use your funds before the end of the year. Employers can also grant a two-and-a-half-month grace period or extension to the time you have to use your funds.
Once you have determined how much to contribute to your FSA, your employer will withdraw a small amount each pay period during the year. But don’t worry, you don’t need to have the full amount in your account to start using it. If you’ve set aside $ 500 for the year, but your account is only $ 250, you can still use your FSA to cover a $ 300 medical bill. The account works the same as a line of credit, except you don’t have to worry about paying it off since it’s already deducted from your paycheck.
There have been some changes in the FSA rules recently. From 2021 to 2022, individuals can carry the entire amount of money forward in their FSA (the carry forward amount has been capped at $ 550 in the past). However, employers have the option of adopting this provision, so check with your employer before leaving any unused funds in your account.
What is the difference between an ASP for dependents and an ASP for health care?
A Dependent FSA and a Health Care FSA are both employer-sponsored accounts where workers can remit money before tax. A Dependent ASP can be used for eligible child care expenses for children under 13 or for a spouse or parent who is unable to care for themselves. A new law, the Consolidated Appropriations Act of 2021 (CAA), however, raised the age limit so that children under 14 are considered dependents in 2021. Child care expenses include daycares, senior care, preschools and summer day camps. .
The contribution ceilings of the FSA for dependents are also higher. Typically, the contribution limit is $ 5,000 for married couples filing jointly and $ 2,500 for single filers. The US bailout, the stimulus bill enacted by President Biden in March 2021, increased the contribution limit for dependents’ ASPs in 2021: for married couples filing joint tax returns, the limit is $ 10,500 and for single filers the limit is $ 5,250.
When determining how much to contribute to an ASP, you should consider any potential medical or health care expenses you may have in the coming year.
For example, if you’re pregnant or recently received a medical diagnosis that required more frequent medical appointments, you might consider contributing more to your FSA to cover medications or co-pay. On the other hand, if you are in relatively good health and plan to go to the doctor only for your annual wellness checkup, you might be contributing less money because you probably won’t need the funds. additional.
Finally, since FSAs are employer sponsored, you should consider whether you plan to quit your job in the next year or so, as you have to spend all the money saved from the FSA before you leave.
There are some major differences between ASPs and health savings accounts (HSA). Both accounts can be used for medical expenses that are not covered by health insurance. However, an HSA is only available to people who have a high deductible health care plan (HDHP). HDHPs are generally a good option for healthy people who don’t have a lot of medical expenses and don’t plan to pay their deductible every year.
An HSA, unlike an FSA, is transferable, so individuals can switch it from one employer to another. With an HSA, you can also carry over your contributions from year to year, so you don’t have to worry about losing the money you put in the account. The contribution limits for HSAs are also higher, $ 3,650 for insured unattached individuals and $ 7,300 for families.
ASPs can be an easy way for people to save money on their medical expenses. However, it is essential that individuals understand their employer’s policies before maximizing their FSA contributions as they vary by employer. You should consider the amount of your medical expenses for the year before contributing and taking advantage of the tax benefits offered by the FSA.
Editorial note: Any opinions, analysis, criticism or recommendations expressed in this article are the sole responsibility of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.