This spending goes beyond just health insurance premiums, and covers everything from medical services to drugs to medical supplies. For those who have kids, child care costs are another huge expense. A flexible spending account FSA is one way to potentially reduce your health care and dependent care spending.
Funded with pretax earnings, an FSA is a special type of account that can be used to pay for a wide variety of qualified costs. One of the biggest advantages of an FSA is that you won't pay taxes when you use these funds as intended. FSAs do come with certain restrictions, however. Here's a comprehensive overview of how they work to help you determine if an FSA is right for you. The only way to enroll in an FSA is through your employer. Not all employers offer this benefit, but if yours does, it could serve as a tax-friendly way to cover certain health care and dependent care expenses.
Once you enroll, you'll choose how much you want to contribute to the account each month or pay period, and that amount will be automatically deducted as a pretax salary reduction. When you need to use the funds, you won't pay taxes on withdrawals as long as they are used to pay for qualified expenses.
What constitutes a qualified expense? The rules vary depending on the type of FSA you have. Employers typically offer one or more of the following:. Once you've set your FSA contribution amount, you generally can't change it unless you experience a qualifying life event such as the birth of a child or a change in marital status.
Otherwise, you'll have to wait for the following open enrollment period. New federal guidelines are providing more FSA flexibility in light of the coronavirus pandemic, however: During , you can modify your contribution rate whenever you like.
You may have two options when using FSA funds. Many plans provide an FSA debit card to pay for expenses though it's still wise to hang on to your receipts in case your plan administrator needs to substantiate a charge.
Alternatively, you may need to cover these costs upfront then submit a claim to get reimbursed afterwards. Here are some important things to consider when deciding if this type of account makes sense for you.
Pros It makes health care and child care more affordable. You fund an FSA with pretax dollars and aren't taxed when you use that money to pay for qualified expenses.
As such, you're reducing the amount of money you're required to pay Uncle Sam. So check ahead of time about your employer's particular rules regarding excess funds. For and , special rules apply to the FSA rollover provision and the grace period. Under the Consolidated Appropriations Act, employers can allow all unused funds to be carried over from to , and from to The effect of either decision is the same: all unused funds can be carried over and used throughout the entire year.
Because of the use-it-or-lose-it rule, you may be tempted to be super-conservative in how much to contribute. And there are always ways to spend the money. Haney also suggests scheduling elective procedures at the beginning of the year, if you want to use FSA funds to pay for them. Certain FSAs allow you to use your total annual contributed funds on the first day for yourself, but only the actual amount in the account for dependents.
Employees can schedule planned medical procedures at the very beginning of the plan year major dental work, braces, infertility treatments, etc. They then have 52 weeks to repay the loan using pretax dollars. Both plans allow you to contribute pre-tax dollars, have annual contribution limits, and can only be used for approved health-related expenses.
But there are a few key differences. However, you can only have an HSA in combination with a high-deductible health plan , which might or might not be the insurance choice you prefer. Because accounts like these are more complicated than basic checking or savings accounts, some consumers may be leery of contributing to an FSA. Internal Revenue Service. Accessed Nov. Health Insurance. Your Privacy Rights. To change or withdraw your consent choices for Investopedia.
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Any interest or earnings on the assets in the account are tax free. You may be able to claim a tax deduction for contributions you, or someone other tahn your employer, make to your HSA. Bank of America recommends you contact qualified tax or legal counsel before establishing an HSA. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Bank of America, N. However, the account beneficiary establishing the HSA is solely responsible for ensuring satisfaction of eligibility requirements set forth in IRC sec In addition, an employer making contributions to the HSA of an ineligible individual may also be subject to tax consequences.
We recommend that applicants and employers contact qualified tax or legal counsel before establishing a HSA. The programs are sponsored and maintained solely by the employer offering the plan, or by an individual establishing an independent plan. Bank of America acts solely as claims administrator performing administrative tasks pursuant to an agreement with, and at the direction of, the sponsoring employer or individual under an independent plan.
The sponsoring employer or individual under an independent plan is solely responsible for ensuring such arrangements comply with all applicable laws. The planning tools and information calculators are illustrative only, and accuracy is not guaranteed.
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