What Is FSA Health Care?

FSA health care accounts are an attractive employee incentive and savings account that are offered by many employers as an employee incentive, helping employees pay out-of-pocket medical expenses not covered by group health insurance. They’re also tax-free savings accounts that allow enrolled employees to reduce taxable income by setting aside funds in an FSA tax-free savings account and avoid Medicare and Social Security taxes on them.

Employees enrolled in flexible spending accounts need to understand all aspects of their flexible spending accounts in order to take full advantage of its benefits and make smart financial choices. We’ve written this article as a resource, outlining what an FSA is, how it operates, which expenses qualify and don’t qualify for reimbursement under its plan and providing tips and tricks that help maximize benefits for workers.

What Is a Flexible Spending Account (FSA)? A flexible spending account (FSA), offered through employers, allows employees to put aside pretax money each year in an FSA to cover eligible out-of-pocket medical costs. Funds are taken out of each paycheck in an annual withdrawal and used towards over-the-counter drugs, prescriptions and copays as well as equipment like bandages and crutches that may also qualify. When used together with an HRA or HSA plan.

An FSA differs from traditional savings accounts in that its money does not get invested or earn interest, rather employers deduct it directly from workers’ wages before tax time arrives. Employees can typically only adjust their contributions during open enrollment or upon experiencing qualifying events such as marriage or child birth; individuals cannot open one independently.

FSAs can be used for a range of expenses, however the IRS limits what can be spent on qualified medical expenses such as diagnosis, cure, mitigation, treatment or prevention of disease or any ailment affecting any structure of the body and certain dental costs. Unfortunately other expenses such as over-the-counter medication and contact lenses do not qualify as qualifying expenses for an FSA account.

FSAs generally adhere to a “use-it-or-lose-it” rule; any unutilized funds will not carry forward into the next year. Some employers may offer a 2.5 month grace period or allow employees to roll over up to $610.

Employers looking to boost enrollment in flexible spending accounts among their workforce can consider offering these options as part of a recruitment incentive strategy. It’s essential that employees understand what expenses can and cannot be expensed and any carryover or grace period rules in place, and offer information explaining why FSAs could be suitable options and compare with other forms of healthcare savings accounts such as HSAs or HRAs.

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