A Flex Spending Account is an account that you can put money into to be set aside toward out-of-pocket health care expenses. Most employers offer FSA benefits to employees if the employees are eligible for other health care plans or benefits. Prescription costs, medical co-payments, office visit fees, dental fees and over-the-counter drugs and medicines are all FSA eligible expenses.
If you have an FSA, the FSA rules only allow you to put $2500 per year in the account, and the money you put into the account must be spent within the year. If it’s not spent, there’s a “use it or lose it” rule associated with FSAs, with some exceptions.
Employers can offer a grace period of up to 2 and half months, which gives employees a chance to finish using the money in the FSA into the next year. Recently, Obamacare has made it possible for there to be another exception to the “use it or lose It” rule. It’s now possible to carry over up to $500 into the new year under Obamacare. But, there are a few catches. In order to be eligible for the $500 carryover, your employer has to first amend their provisions to allow the carryover and second, the employer has to drop the grace period provision. It’s one or the other. The new provision doesn’t require an additional timeline for using the money, but it does cap the amount of money that you can spend in the next year. This all has to do with the fact the money going into the FSA is tax-free.
So why get an FSA account? If you know you’re going to have a lot of health care expenses, FSAs allow employers to put some of your paycheck into the FSA without being taxed. That means that even though you could just spend the money out of your wallet and you’d be paying the same amount, you’re actually getting more money from your paycheck because a portion of it is going into the FSA account before taxes.
If you are going to open an FSA account, the key is to make a careful decision on how much money to put into the account. The more money in the account, the more money that you earn without having to pay taxes. But, if you put way more money into the account that you spend, you’ll lose the money. While there are the $500 carryover or grace period provisions, you can still end up losing money if you overestimate. As long as you can make a good estimate of your out-of-pocket health expenses for the year, FSAs are a great option.