Flexible Spending Accounts are an easy way to set aside money from your paycheck to help you pay for qualifying medical or dependent daycare expenses, while saving you money on payroll taxes. But Flexible Spending Accounts can seem scary if you don’t understand the rules. Keep these things in mind.
These accounts can be offered by your employer, based on rules from the IRS. The IRS sets maximum amounts that you can elect and has rules about how the pre-tax dollars that you set aside from your check can be used.
- Medical FSA Hazards – Once you decide you want to enroll with a Medical FSA, carefully plan what you believe your out-of-pocket eligible medical expenses will be. If you put too little in, you will run short when the time comes to pay your medical bills. If you put too much in, you may end up losing money at the end of the year. The IRS does not allow for mid-year election changes without a qualifying event and does not allow refunds of unused FSA amounts.
- Medical FSA Advantage – The way these plans are set up, you have access to your full annual election as of the first day of the plan year. This means that even if you haven’t made a deposit into the plan yet, you can still pay for an out-of-pocket medical expense through your FSA on day one. As you continue to receive paychecks, you will be paying back what was spent from your account.
Dependent Care FSAs
Don’t be confused by the name. These FSAs allow for pre-tax dollars to be saved to pay for Dependent Daycare expenses NOT dependent medical expenses. While you are certainly able to pay for a dependent’s out-of-pocket medical expense through your FSA Medical account, the Dependent Care FSA is for reimbursement of Dependent Daycare expenses only.
- Dependent Care FSA Hazards – With these plans, you can only be reimbursed for what you have already deposited into the account. In other words, you cannot get out more than what you have put into the account.
- Dependent Care FSA Advantage – Generally, if you file a claim for more than what you have already deposited into the account, this claim will stay on file with the provider and they will continue to reimburse you for this claim as payroll deposits are made into the account.
Most FSA providers have tools to assist you in the management of your accounts. These tools are usually on their web site and many have apps for your phone, so you can manage your account on the go. They allow you to see when documentation is required to process your claim, submit your claim online, review your balance, as well as many other useful things.
The key to FSAs is planning. If you’re prepared, there’s no reason to be scared!