[Updated for 2015] Flexible Spending Accounts (FSA) have been around for a while now and many families use them as a tax advantaged way to save for health care related costs.. If you use FSA or similar pre-tax accounts like a Health or Dependent Care Savings Account these are changes you should be aware of, particularly during open enrollment when you make your FSA allocations for the year ahead.
Many employers offer Flexible Spending Accounts (FSA) to their employees. This is an account where a certain amount of money is deducted from an employee’s paycheck and placed in to an account that is used to pay for authorized medical expenses. These expenses include doctor’s visits, prescription medications and eyeglasses. However funds in a Flexible Spending Account cannot be used to pay for over the counter (OTC) products, unless they are prescribed by a doctor. Some drugs, including insulin, will be exempt from this rule. For doctor’s to prescribe an OTC drug, they will need to show cause that the drug is a necessity for the patient.
However there are mandated FSA contribution limits on how much employees can contribute to these accounts as shown in the table below. Employers though can also set their employees maximum contribution which may be below the IRS contribution limit shown in the table below. Your employer may also allows you to carry up to $500 of your remaining balance into a subsequent year.
|Year||Min. FSA Contribution||Max FSA. Contribution|
Because these funds are deducted on a pre-tax basis, no tax is paid on the contributions. This means that the employee is essentially getting a discount on medical expenses equal to their effective tax rate, often representing hundreds of dollars in savings over the course of the year that these funds can be used. However, any unused FSA funds at the end of the plan year are forfeited by the employee, known as the use-it or lose-it feature. That is why you must spend time planning your FSA contribution and only put away what you can reasonably expect to spend.