Details about the healthcare Flexible Spending Account
A Flexible Spending Account (FSA) is a great way for members to reduce their healthcare costs and make budgeting easier. The member's employer takes money out of his or her paycheck before taxes; then the member draws on the funds during the plan year to pay for qualified expenses. Members should make sure to set aside only as much as they’ll use with an FSA, since they typically can only use the money for expenses that occur during the current plan year.The member's employer determines what types of expenses are qualified, within guidelines defined by the Internal Revenue Service (IRS). Most employers’ plans cover the following:
- Medical expenses like deductibles and copayments
- Out-of-pocket prescription costs
- Dental expenses
- Vision services
When members have money in an FSA, they have peace of mind in knowing that they can cover healthcare expenses that the plan doesn't cover. Budgeting is easier because they’re paying a little with each paycheck, instead of paying a lot of money at one time. Plus, members have access to the full annual amount of their healthcare FSA election on the first day of the plan year.
The member's employer can also offer a separate FSA for qualified dependent care expenses, such as childcare or adult day care for a dependent that’s under the age of 13 or disabled. In many cases, members can set up a healthcare account, a dependent care account, or both accounts, depending on their situation.
If the member's employer offers a Health Savings Account (HSA), HSA participants can have a "limited" FSA for vision, dental and preventive care expenses.
Tax savings example
Last year, Laura made $28,000 and put $1,500 in her healthcare FSA. The example below shows how much she saved by using the pre-tax money for qualified health expenses. Without an FSA, she would have paid for these expenses from her take-home pay, which she paid taxes on.
| Example of annual tax savings* | With FSA | Without FSA |
|---|---|---|
| Laura’s taxable income | $28,000 | $28,000 |
| Pre-tax money deposited into her FSA | -1,500 | -0 |
| Laura’s remaining taxable income | 26,500 | 28,000 |
| Minus federal and Social Security taxes | -9,447 | -9,982 |
| Take-home pay spent on qualified expenses | -0 | -1,500 |
| Laura’s remaining take-home pay | $17,053 | $16,518 |
Putting pre-tax money in an FSA saves Laura $535 on her federal tax bill – plus she’ll save on state taxes as well.
* This example is intended to demonstrate a typical tax savings based on 28 percent federal and 7.65 percent FICA taxes. Actual savings will vary based on the individual's tax situation.