You’ve just started a new job, and it seems like every time you turn around you have new paperwork that requires your signature. Income tax forms, health insurance, company policies and more. Most of the things you’re familiar with, but you’re not sure about flexible spending accounts. What are they and how do they work? Get all the facts below.
What is a Flexible Spending Account?
A flexible spending account, also known as a flex spending account or FSA, is a financial account that’s set up by an employer and offered as an employee benefit. They are offered by many companies throughout the United States. The FSA allows employees to set aside a designated amount of their paycheck and put it in a special account designed for FSA eligible expenses, as determined by the plan. The major FSA benefit is that it saves employees tax dollars.
How Do Flexible Spending Accounts Work?
Some people mistakenly believe that an FSA is just a savings account that an employee gets with the help of the employer. While an FSA may be a type of saving, it’s providing the employee with pre-tax dollars to pay for healthcare expenses that are not covered by health insurance.
Because the money is taken out of the employee’s paycheck before income taxes, the remaining paycheck is in a lower tax bracket, thus saving the employee even more money than just savings account alone would. Employees can use their FSA to pay for their health care in a couple of ways. They can pay it directly and have the money reimbursed right back in their account, or they can get an FSA debit card and pay the expenses with the card.
How Do You Get One?
A flexible spending account is a type of employee benefit you get from your employer. You can put in the money, and the employer can put money into your FSA as well. They are only available with employment-based health plans.
What Do You Use it For?
The two most common types of flexible spending accounts are the health care FSA and the dependent care FSA. However, the health and dependent care FSAs are the two that most come to mind when employees hear the words flex spending account.
If you have a health FSA, you can only use it for FSA eligible expenses that are qualified according to the FSA rules. Generally, these are expenses such as deductibles or health expenses, such as eye care, over-the-counter expenses and expenses are not covered under the insurance.
What Are the Rules?
You can only contribute up to $2,500 into your healthcare FSA. The money must be used in that year. You designate or estimate how much you’ll need for your qualified expenses and the amount is divided by the number of pay periods in a year.
It’s important to estimate carefully, because the plan will only allow you to have $500 left over at the end of the year. Any amount over that will be lost.
