1. What is a Flexible Spending Account (FSA)?
A Flexible Spending Account (FSA) is an account plan set by your employer with your consent for healthcare expenses. This fund is deducted from your salary and must be used on flexible spending account eligible expenses within the year.
According to IRS, having an FSA may help you save money because of the following benefits:
- The contributions are free from employment or federal income taxes.
- Qualified medical expenses reimbursements may be tax free.
- If your employer contributes to it, it can be excluded from the gross income.
2. How Does a Flexible Spending Account Work?
You elect an amount to be set aside for flexible spending account at the beginning of the plan year. Then your employer sets aside a portion of your salary and allocates it to your FSA fund. This fund may then be used throughout the year for eligible healthcare expenses.
For instance, you have an account plan of $1600 this year. You may use all of $1600 on any day of the year of your plan or choose to spend it portion by portion within the year.
Just make sure to use it or else you lose it. IRS sets the rule for FSAs to “Use It or Lose It”. This rule means you have to spend your fund on eligible expenses before the deadline or it will be returned to your employer, unless your plan has a grace period or a rollover option.
Here are 3 ways to use your FSA:
FSA Debit Card or Stored Value Card
An FSA Debit Card or Stored Value Card can be used to purchase eligible items in some flexible spending account stores like Walgreens and Walmart FSA shops. The use of FSA card automatically debits the amount from your yearly plan, so no reimbursement is needed after the purchase.
If you don’t have an FSA card or if the stores where you want to buy don’t honor the said card, you have to use your money out of pocket to pay for FSA-eligible expenses.
When the purchase has been done, you may reimburse or claim your money back from your FSA administrator using their online service. You will then be asked to submit your claim form and supporting documents like receipts, prescription, and letter of medical necessity depending on your purchases.
Snail Mail Claim
Just like the online claim form, you have to use your out-of-pocket money to make eligible expenses. Then, instead of filling out the online form, you have to print a claim form and manually fill it out. The documents must then be submitted with the claim form to your administrator’s claim address.
3. FSA Deadline
The FSA rule of the Internal Revenue Service (IRS) is to “use it or lose it”. Under the said rule, you have to use your FSA balance before the set deadline or it will be returned to your employer.
But now, there is more flexibility to this rule. The Department of Treasury and the IRS now give the option of using the old rule or have a rollover or a grace period.
Nevertheless, you still have to take note of these key dates if you own a flexible spending account:
Plan year – Jan 1, 2019 – December 31, 2019
Deadline to incur FSA eligible expenses – December 31, 2019
Deadline for submitting claims (claim forms & receipts) – May 31, 2020.
4. FSA Rollover
If your employer plan offers an FSA rollover, you can carry over the unused FSA funds of up to $500 to the next year.
Say for instance you have $1500 in your account for 2019. If you used $1000 for healthcare and you have unused $500, this remaining amount will be carried over to your 2020 plan.
5. Grace Period
A grace period is an extension of up to 2.5 months to incur FSA-eligible expenses. Hence, even if the deadline is December 31, all eligible expenses for 2019 may still be made until March 15, 2020.