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If you're looking to save money on your medical expenses, you might consider opening a flexible spending account (FSA). With an FSA, individuals can use pre-tax money on a number of expenses that your medical or dental insurance doesn't cover, including co-pays and coinsurance, as well as certain health-care needs like prescription and some over-the-counter drugs, feminine hygiene products, contact lenses and glasses. Websites like FSA Store and Amazon highlight products that are FSA eligible, from face wash to painkillers.
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One big catch about an FSA is that it's an employer-sponsored plan, so you can only set one up if it's offered by the company you work for. You can usually only sign up during open enrollment period and contribution rules vary by employer.
Below, Select walks readers through everything they need to know about an FSA.
The major perk of using an FSA is that you can set aside pre-tax dollars for medical expenses, which can help you save money. For example, if you owe 30% in state and federal income taxes and contribute $1,000 to your FSA, you save $300 by putting that money in 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 security tax is 6.2% for the first $142,800 in income
- The Medicare tax is 1.45% for all of your income, and if you make more than $200,000 you pay an additional 0.9%
- For people making less than $142,800, the combined payroll tax rate is 7.65%.
If you make $100,000 and contribute $2,000 to an FSA, you'll save $153 in payroll taxes. There are online calculators available to help you calculate how much money you'll save in taxes by contributing to your FSA.
An individual can contribute up to $2,750 per year through their employer. If you're married and your spouse has an FSA through their employer, they can also contribute $2,750.
There are some rules you must follow in order to take advantage of an FSA. Individuals must use the money they place in the account within a year or risk losing it. You can typically only carryover $550 from your account each year. The maximum amount you can contribute the next year does not change if you choose to carryover money from the previous year.
Rollover rules are set by employers, so you should check with yours to find out if you need to use your funds before the year ends. Employers may also provide a grace period or an extension of two and a half months on the time you have to use your funds.
Once you settle on how much to contribute to your FSA, your employer will withdraw a small amount each pay period over the course of the year. But don't worry, you don't have to have the full amount in your account to start using it. If you've set aside $500 for the year, but your account only has $250 in it, you can still use your FSA to cover a $300 medical bill. The account works similar to a line of credit, only you don't need to worry about paying it back since it's already being deducted from your paycheck.
There have been a few changes to the FSA rules recently. From 2021 to 2022, individuals can rollover the full amount of money in their FSA (the carryover amount has been capped at $550 in the past). However, employers have the choice to adopt this provision, so check with your employer before you leave unused funds in your account.
A dependent-care FSA and a health-care FSA are both employer-sponsored accounts where workers can contribute pretax money. A dependent-care FSA can be used for qualified dependent care expenses for children under the age of 13 or for a spouse or relative who is unable to take care of themselves. A new law, the Consolidated Appropriations Act of 2021 (CAA), however, raised the age limit, so children under the age of 14 qualify as dependents in 2021. Dependent-care expenses include daycare, eldercare, pre-schools and summer day camps.
The contribution limits on dependent care FSAs are also higher. Typically, the contribution limit is $5,000 for married couples filing jointly and $2,500 for single filers. The American Rescue Plan, the stimulus bill signed into law by President Biden in March 2021, increased the contribution limit for dependent care FSAs in 2021: For married couples filing joint tax returns, the limit is $10,500 and for single filers, the limit is $5,250.
When figuring out how much you should contribute to an FSA, you should consider what potential medical or health-care expenses you might have in the upcoming year.
For example, if you're pregnant or recently received a medical diagnosis that requires more frequent doctors' appointments, you might consider contributing more to your FSA to cover medications or copays. On the other hand, if you're relatively healthy and only plan on going to the doctor for your annual wellness exam, you might contribute less money because you likely won't need the extra funds.
Lastly, since FSAs are employer-sponsored, you should think about whether you're planning to leave your job within the next year because you must spend any saved FSA money before you leave.
There are a few major differences between FSAs and health savings accounts (HSAs). Both accounts can be used for medical expenses that are not covered by health insurance. However, an HSA is available only to people who have a high deductible health-care plan (HDHP). HDHPs are typically a good option for healthy individuals who don't have a lot of medical expenses and don't anticipate meeting their deductible each year.
An HSA, unlike an FSA, is portable, so individuals can take it from employer to employer. With an HSA you can also rollover your contributions from year-to-year, so you don't have to worry about losing any money you've put in the account. The contribution limits for HSAs are also higher, $3,650 for single-insured individuals, and $7,300 for families.
FSAs can be an easy way for people to save money on their medical expenses. However, it's critical that individuals understand their employer's policies before maxing out their FSA contributions as they vary by employer. You should consider how much your medical expenses will be for the year before you contribute and take advantage of the tax benefits an FSA offers.