A Flexible Spending Account (FSA) is an IRS approved account you set up to pre-fund your anticipated, eligible medical services, medical supplies and dependent care expenses normally not covered by your insurance. You can enroll in a Medical Expense FSA, Dependent Care FSA, or both.
A Medical Expense FSA may be used to reimburse eligible expenses incurred by yourself, your spouse, your qualifying child or your qualifying relative. While a Dependent Care Flexible Spending Account to receive reimbursement for eligible dependent care expenses for qualifying individuals.
Medical Expense FSA funds are available in one lump sum at the beginning of your employer’s plan year. The funds for both Medical and Dependent Care FSAs are deducted before federal and state taxes are calculated on your paycheck, in small equal amounts from your paycheck over the course of the plan year.
With either FSA, you benefit from having less taxable income in each of your paychecks, which means more spendable income to use toward your eligible medical and dependent care expenses.
| FSA Savings Example* | ||
| With FSA | Without FSA | |
| $31,000 | Annual Gross Income |
$31,000 |
| - 5,000 | FSA Deposit for Recurring Expenses |
- 0 |
| $26,000 | Taxable Gross Income |
$31,000 |
| - 5,889 | Federal, Social Security Taxes |
- 7,021 |
| $20,111 | Annual Net Income |
$23,979 |
| - 0 | Costing of Recurring Expenses |
- 5,000 |
| $20,111 | Spendable Income |
$18,979 |
|
||
$1,132! |
||
| * Based upon a 22.65% tax rate(15% federal and 7.65% Social Security) calculated on a calendar year. | ||
A Medical Expense FSA (MFSA) is used to pay for eligible medical expenses, incurred by yourself, your spouse, a qualifying child or relative (defined below), which aren’t covered by your insurance or other plan. The full amount you select to contribute over the course of the year is available to use at the beginning of the plan year, meaning you don’t have to wait for the money to accumulate before you can begin using it.
The maximum amount you may contribute to an MFSA varies by employer. There is no IRS limit on MFSAs, however employers generally limit the annual amount each employee may contribute. Employers set limits typically to reduce their pre-funding responsibility – if an employee leaves or is terminated and thus no longer pays in to the plan, the employer does not retain the funds initially pre-funded for the MFSA account with.
When selecting an amount to contribute to an MFSA it is important to budget conservatively. Any funds that are left over in the account at the end of the plan year cannot be carried over to the next year or refunded. There is an IRS permitted grace-period, and some employers have a run-out period in addition to this, which creates an extended period for filing claims and/or using funds beyond the plan year. Claims submitted during these extended periods must be for services incurred during the plan year. Check with your employer for their specific funding limits and periods.
Purchases with an MFSA must be intended to treat or prevent a specific medical condition; this can be as significant as diabetes or pregnancy, or as minor as a skin cut. Certain items cannot be purchased using an MFSA, see the list below for some examples of eligible and ineligible expenses.
Partial List of Medically Necessary Eligible Expenses:
- Acupuncture
- Ambulance service
- Birth control pills and devices
- Chiropractic care
- Contact lenses (corrective)
- Dental fees
- Diagnostic tests/health screening
- Doctor fees
- Drug addiction/alcoholism treatment
- Drugs
- Experimental medical treatment
- Eyeglasses
- Guide dogs
- Hearing aids and exams
- In vitro fertilization
- Injections and vaccinations
- Nursing services
- Optometrist fees
- Orthodontic treatment
- Over-the-Counter Medicine
- Prescription drugs to alleviate nicotine withdrawal symptoms
- Smoking cessation programs/treatments
- Surgery
- Transportation for medical care
- Weight-loss programs/meetings
- Wheelchairs
- X-rays
Partial List of Ineligible Expenses:
- Insurance premiums
- Vision warranties and service contracts
- Cosmetic surgery not deemed medically necessary to alleviate, mitigate or prevent a medical condition
Your Medical Expense FSA may be used to reimburse eligible expenses incurred by:
- Yourself
- Your spouse
- Your qualifying child, or
- Your qualifying relative.
An individual is a qualifying child if they are not someone else’s qualifying child and:
- Are a U.S. citizen, national or a resident of the U.S., Mexico or Canada
- Have a specified family-type relationship to you
- Live in your household for more than half of the taxable year
- Are 18 years old or younger (23 years, if a full-time student) at the end of the taxable year and
- Have not provided more than one-half of their own support during the taxable year.
An individual is a qualifying relative if they are a U.S. citizen, national or a resident of the U.S., Mexico or Canada and:
- Have a specified family-type relationship to you, are not someone else’s qualifying relative and receive more than one-half of their support from you during the taxable year or
- If no specified family-type relationship to you exists, are a member of and live in your household (without violating local law) for the entire taxable year and receive more than one-half of their support from you during the taxable year.
There is no age requirement for a qualifying child if they are physically and/or mentally incapable of self-care. An eligible child of divorced parents is treated as a dependent of both, so either or both parents can establish a Medical Expense FSA.
A Dependent Care FSA (DCFSA) is a great way to pay for eligible dependent care expenses such as after school care, baby-sitting fees, daycare services, nursery and preschool. While most commonly used for child care, it can also be used for adult day care for senior citizen dependents that live with you, such as parents. It cannot be used for summer camps (other than "day camps") or for long term care for parents that live elsewhere (such as in a nursing home). Eligible dependents include your qualifying child, spouse and/or qualifying relative.
The DCFSA has a federal limit on the maximum amount you may contribute per plan year of $5,000. Married spouses can each elect to have this amount deducted from their paycheck and applied to expenses, however at tax time any withdrawals in excess of the $5,000 are taxed. Unmarried couples can deduct and use $5,000 each. Certain exceptions and rules apply to this limit.
For a Dependent Care FSA –
Minimum Annual Deposit: Varies by employer
Maximum Annual Deposit: Depends on your tax filing status
- If you are married and filing separately, your maximum annual deposit is $2,500.
- If you are single and head of household, your maximum annual deposit is $5,000.
- If you are married and filing jointly, your maximum annual deposit is $5,000.
- If either you or your spouse earn less than $5,000 a year, your maximum annual deposit is equal to the lower of the two incomes.
- If your spouse is a full-time student or incapable of self-care, your maximum annual deposit is $3,000 a year for one dependent, and $5,000 a year for two or more dependents.
If married, BOTH spouses must earn income in order for the DCFSA to work. The only exception is if the non-earning spouse is disabled or a student. If one spouse earns less than $5,000 then the benefit is limited to whatever that spouse earned.
Dependent Care FSAs cannot be "pre-funded" like Medical Expense FSAs can; employees receive reimbursement as funds are deposited into the DCFSA. They may be used to receive reimbursement for eligible dependent care expenses for qualifying individuals.
A qualifying individual includes a qualifying child if they:
- Are a U.S. citizen, national or a resident of the U.S., Mexico or Canada
- Have a specified family-type relationship to you
- Live in your household for more than half of the taxable year
- Are 12 years old or younger and
- Have not provided more than one-half of their own support during the taxable year.
A qualifying individual includes your spouse if they:
- Are physically and/or mentally incapable of self-care
- Live in your household for more than half of the taxable year and
- Spend at least eight hours per day in your home.
A qualifying individual includes your qualifying relative if they:
- Are a U.S. citizen, national or a resident of the U.S., Mexico or Canada
- Are physically and/or mentally incapable of self-care
- Are not someone else’s qualifying child
- Live in your household for more than half of the taxable year
- Spend at least eight hours per day in your home and
- Receive more than one-half of their support from you during the taxable year.
Remember only the custodial parent of divorced or legally-separated parents can be reimbursed using a Dependent Care FSA.
When selecting an amount to contribute to a Dependent Care FSA, like a Medical Expense FSA it is important to budget conservatively. Any funds that are left over in the account at the end of the plan year cannot be carried over to the next year or refunded. There is an IRS permitted grace-period, and some employers have a run-out period in addition to this, which creates an extended period for filing claims and/or using funds beyond the plan year. Check with your employer for the details of their grace and run-out periods.
Partial List of Eligible Dependent Care Expenses:
- After school care
- Baby-sitting fees
- Daycare services
- In-home care/au pair services
- Nursery and preschool
- Summer day camps
Partial List of Ineligible Expenses:
- Books and supplies
- Child support payments or child care if you are a non-custodial parent
- Health care or educational tuition costs and
- Services provided by your dependent, your spouse’s dependent or your child who is under age 19.
Helpful Links:
IRS FSA Information
