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FSA – What is a Health FSA

FSA – What is a Health FSA?

A health care FSA can reimburse you or help you pay for eligible health care expenses not covered by your health plan. The portion of your paycheck you put into your FSA is taken out before you pay federal income taxes, Social Security taxes and most state taxes. It’s a great way to save money.

Example FSA Savings

Without FSAWith FSASavings
Family co-payments$80$48$32
Contact lenses and solution$400$240$160
Over-the-counter items$300$180$120
Braces and dental co-insurance$2,520$1,512$1,008
Yearly Total:$3,300$1,980$1,320

Tax Savings

Generally, contributions you make to your FSA are not subject to federal income taxes or social security taxes. In most instances, there are no state taxes taken out either. The amount you may save depends upon:

  • The amount you put into your FSA
  • The tax percentage you would normally pay on that money (tax bracket)

Let’s say you want $2,000 taken out of your paycheck this year to put into your FSA. The money you direct to your FSA is taken out of your check before taxes are taken out. That reduces your taxable income by $2,000.

Let’s say you normally pay 30 percent in federal, social security and state taxes on your income. In this example, you would enjoy a tax savings of 30 percent of the $2,000. In other words, you could get a $600 tax savings on the $2,000 you directed to your FSA.

This example should not be taken as tax advice. See a tax advisor to seek the best advice for your situation. To see how much you may save, check out Aetna’s FSA Savings Calculator.

Your Contribution

Ready to decide the amount you want in your FSA? It’s good to plan ahead.

  • Consider the medical, vision or pharmacy costs not covered by a health plan. Need dental work? How about contact lenses? Buy cold medicine, aspirin and sunscreen throughout the year? Your FSA may help pay for these items and more.
  • Also look at family changes that might have an impact on your expenses.

Due to Health Care Reform the IRS now limits the amount you can put into a health care FSA. The IRS limitation for FSA contributions is $2,500 per employee. Your employer may also set a minimum amount you can contribute. Review your enrollment materials to learn the minimum and maximum amounts you can set aside in your account.

Just remember this: FSA dollars are “use-it-or-lose-it” funds. Account balances cannot be carried over from year to year. If you have any unused funds at the end of the plan year, or at the end of any applicable grace period, those funds will be forfeited. That’s an IRS requirement. So estimate what you want to direct to your FSA carefully.

For help deciding how much to contribute, check out the FSA Savings Calculator.

$500 Roll-Over  

Up to $500 in unused funds can rollover into the following plan year. Any amount that rolls over into the new plan year does NOT affect the maximum salary reduction election the employee can make for the new plan year.

Medical FSA contributions limited to $2,750 per year  – Jan 2020 UPDATE

Starting in 2020, you can set aside up to $2,750 per year into a medical Flexible Spending Account, or FSA. This limit applies to each plan, not each person on the plan. FSAs, also called Flexible Spending Arrangements, are funds that you can use to pay certain types of health care expenses. Not all employers offer FSAs as part of their benefits.

What’s good about FSAs? They’re tax-free. What’s not so great? At the end of the year, what you don’t use, you lose, unless your plan has a grace period. So before you fund your FSA, estimate how much of your expenses would qualify for FSA reimbursement. That way, you don’t set aside more than you’re likely to spend.

Not sure what you can use your FSA funds for? Think out-of-pocket health care expenses – medical, dental and vision charges not paid by your insurance. Some FSAs reimburse dependent care expenses. Check your FSA for details.

Here’s what’s different

Before 2013, there was no limit on how much you could put into your FSA. Now, the most you can contribute is $2,750 per year. Also, there’s a new rule on medical spending accounts like FSAs. You can use FSA funds for over-the-counter medicine only if you have a prescription. Keep this in mind when planning your FSA contribution.

How it impacts you

If you don’t have an FSA, this doesn’t affect you. But if you have one, you can only set aside $2,500 or less. This puts a limit on your tax savings. But it also limits your loss if you end up not using all of your FSA funds.

Will the FSA contribution limit stay at $2,750 every year?

No. It will be adjusted yearly for inflation.

Does this new rule mean I need to have an FSA?

No. But if you have a lot of health care expenses that can qualify for reimbursement, it might be a good idea. Especially if you pay about the same each year.

Does the $2,750 limit apply to other types of spending accounts?

No. The limit only applies to FSAs. It doesn’t affect your health reimbursement arrangement (HRA), health savings account (HSA) or medical savings account (MSA).

Will my FSA funds roll over to the next year?

No. You’ll lose any FSA dollars left at the end of your plan year, so plan your contribution well. Some employers give you a grace period after the end of the year to use your FSA funds.

What happens if I use my spending account funds for nonqualified expenses?

Funds used for nonqualified expenses will be taxable and may be subject to 20% tax penalty. This only applies to Health Savings Account and Medical Savings Account funds.

Do I need a prescription to use my spending account funds for insulin?

No. You can use your spending account funds to purchase insulin without a prescription.

Click below to find an infographic and full explanations of these benefits to help clients make informed decisions. Ask us about our preferred SMB Payroll Partnership Program – (855)667-4621.

Pre-Tax Benefits for Your Small Business

Pre-Tax Benefits for Your Small Business

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