Inside: Find out how enrolling in a health flexible spending account will save you money by putting more back in your pocket thanks to tax savings.
Note: updated for 2020
Autumn is knocking at our door and that means it will soon be open enrollment season at many workplaces. This is a great chance for families to save money on taxes.
One great benefit many employers offer is a tax-advantaged health flexible spending account (FSA). What makes this plan so great?
The TL;DR: Do it. It is a tax saving move and the health FSA will save you money.
Now for some of the details:
How the health FSA will save you money
A health FSA allows you to pay for health insurance copays, uninsured medical treatments such as new prescription eyeglasses, or even orthodontia treatments.
Help cover healthcare costs
You might find that with your health insurance you are required to pay $20+ for each visit to the doctor and then 20% of the final bill. Money that you have set aside in the FSA can be used to pay those fees. You can also cover treatments your insurance doesn’t per IRS guidelines (a bit of not-so-light reading). Do note that, other than insulin, any medications require a prescription in order to be covered by the FSA.
Provides tax savings
No federal or employment taxes are taken from the amount you contribute to a FSA plan. How great is that?
Your gross pay is effectively lowered because contributions to the FSA are done pre-tax. By not paying taxes on the money you contribute to the FSA, you are essentially increasing your take home pay.
Example: You are in the 25% tax bracket. This year you opt to contribute $2000 to the health FSA. By doing this, you are reducing your taxable income by $2000 and paying $500 less in taxes. That is an extra $500 you take home.
Can use when needed
You can use the funds from the account for qualified expenses even before you have deposited funds to the account.
This is an interesting feature. Funds are normally contributed to the account with a deduction from each paycheck throughout the year. Let’s say you have pledged to fund your FSA with $2000. Then perhaps little Lucas breaks his leg skiing AND manages to break his glasses, both in January. The bills come in and you need the money for $500 in co-pays, deductibles and new glasses that aren’t covered by insurance. Even if you haven’t paid $500 into the flexible savings account yet, the rules allow you to take up to the full amount you pledged from the account right away.
In February you then decide to leave your job. At this point you’ll want to check company policy. Some companies may let the advancement of funds slide, but most will deduct any amount owed to zero out the FSA from your final paycheck.
Limits on FSA
The contribution limit in 2020 for health FSAs is $2750. The limit for the next may go up, however the Internal Revenue Service often announces any new limit annually by mid-November. Check with your benefits coordinator for details.
However, unlike dependent care FSAs, health FSA limits apply on an employee-by-employee basis rather than a family basis. So if both you and your spouse have the ability to contribute to a health FSA, and you know junior has a $6000 bill for braces coming up that isn’t covered by insurance, most of that can be covered tax-free if you both maximize your FSA contributions.
Determine your FSA needs
FSA accounts are a use-it-or-lose-it account. You could lose any funds left over at the end of the plan year. Your employer may elect (but doesn’t have to) to allow either $500 to roll over into the next year, or for a 2.5 month grace period for using any remaining funds. It is better to plan wisely.
Carefully determine your needs as best you can because you don’t want to waste any money you put into the account. Think about how much you will need for doctor visits, prescriptions, eye exams, and other health services. Will there be braces or a birth or planned surgery coming up this next year? A calculator you can use to help figure out how much to contribute can be found here.
Enrolling in the FSA
The benefits department at your workplace will let employees know when open-enrollment period starts. Ask if you are unsure. The only other time during the year you are allowed to make changes to your benefits is when you have a qualified “family status change.” That occurs when there is a birth, adoption, marriage, divorce, or loss of spouse’s coverage.
Opting into benefits is an annual event and elections and contribution amounts don’t automatically carry over each year, so plan a little time to review your options and sign up each year. It really is worth it.
Have you ever had money left over in your FSA?