What You Need to Know About Your FSA

Most readers of this blog understand the basics of Flexible Spending Accounts (FSAs) and why they are an important employee benefit. If you are employed and obtain your health insurance from your employer like 62% of Americans in the work force, then you probably use an FSA as part of your own benefits plan. As with many provisions in healthcare, though, you may not be up-to-date on all of the finer points of an FSA. Even if you are, it never hurts to brush up on the basics.

FSAs Cover More Than Just Medical Expenses

Federal law, not your employer's HR department or benefits administrator, dictates how an FSA may be used. While most consumers associate FSAs with covering coverage premiums and medical copays and deductibles, it is useful to know that FSAs go much further than that.

An FSA can be used to cover a variety of expenses outside of the doctor's office. Many employer-based health plans, for example do not offer dental or vision coverage. With an FSA, an employee can use his or her pre-tax income to pay for dental or vision coverage and services that may not be provided, especially by smaller employers.

Many are surprised to find that their FSA will not only cover services provided in the setting of a medical, dental, or vision professional office, but they also cover things that can positively affect your well-being but are not exactly medical services. A few include:

  • Birth control pills and other contraceptive devices
  • Over-the-counter drugs and medications, although the health reform bill will limit the FSA coverage of many of these items
  • Membership in a gym (if specified by a physician)
  • Massage therapy (also if specified by a physician)
  • Sunscreen with an SPF of 30 or above
  • Hand sanitizer

Under the vein of dependent care expenses, also covered by an FSA, one can pay for a variety of services for his or her dependents, such as day camp for a child under the age of 13. You can even use a flexible spending account to remove lead paint from your home if the afflicted areas are in the reach of children, in addition to other home improvements that will have a demonstrable health benefit for your family.

Strategies for Saving Money with FSAs

Ultimately, it all comes back to saving money. Saving money on healthcare expenses is the main attraction for consumers to save with an FSA and approximately 90% of all employers who provided health insurance in 2008 offered a FSA option for their employees. Money saved through FSAs is done so pre-tax, creating a major tax benefit for those who consume medical services or require dependent care.

The broad application of FSAs create an opportunity for nearly anyone to save pre-tax money on healthcare, since an employee can save in an FSA no matter what kind of healthcare plan they elect to receive. A health savings account (HSA), on the other hand, is restricted to be used only with high deductible health plans. Many consumers interchange HSA and FSA terminology, but in reality they are quite different and the proliferation of HSA use is a fraction of what FSAs have become.

To get the most from your FSA, it is a no-brainer to maximize your benefits by paying for your premiums and deductibles with FSA-approved funds. Nowadays, we see many employers automatically applying FSA dollars to cover insurance premiums, leaving the employee with relatively simple decisions, such as how much of the deductible or other care expenses to set aside in the FSA.

While most people are aware of the FSA's "use-it-or-use-it" characteristic, it always bears repeating. Unlike a HSA, FSA's must be used by the end of each plan year. Forecast carefully to make sure you get the maximum FSA benefit but don't overshoot the target.

FSAs Changed Under Health Reform

Nearly every aspect of healthcare was impacted by the recent Patient Protection and Affordable Care Act (PPACA), and FSAs are no exception. With the passage of the PPACA, FSAs are now fitted with a contribution cap. Prior to this law, there was no cap on contributions from an employee. Starting January 1, 2011, FSA contributions from employees will be limited to $2,500 a year. While statistics show that very few participants ever saved that kind of money in an FSA, the cap may be relevant to families or others who are heavier consumers of healthcare services.

Also important to note is that after January 1, 2011, most over-the-counter medicines will no longer be covered by FSAs. Why would they be targeted by health reform? The expected additional tax revenue from not being able to run these things through a pre-tax account will help pay for the bill.

Always Changing

In short, while the concept of FSAs remains relatively stable from year-to-year, the finer point of what is covered and how much you can save is continually changing. Do your homework a couple times a year and stay current on how to get the most out of this vehicle.

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Guest's picture

That's just wonderful that the FSAs are being capped at $2500. (not!) This year and next we'll be using a lot of health care. We had our amount set to $3000 this year because we're having a baby and expect higher than normal expenses. It was nice to save a bit on taxes. Next year should be the same amount of spending for us, yet we won't be saving as much because of the health care provision. Kind of funny how so many thought the health care bill would make health care cost less, but for most people it means increased cost.

Guest's picture

I almost didn't read this article, but the impact of the PPACA information was something I did not know (THANK YOU for sharing!). Why would they cap the spending by half (it's currently $5000)? That is really just ludicrous to me. Our 2-person household (no kids included) have ALWAYS exceeded that $2500 limit! Glad hubby got LASIK this year instead of waiting!

Guest's picture

According to our FSA's website the limit on contributions limit won't change to $2500 until 2013. Does anyone know if this is correct or is the article correct in saying it will change in 2011?

Guest's picture

2013 is correct

Guest's picture

FSAs are great plans, but I usually find that Health Savings Accounts (HSAs) are usually better. They don't expire (use it or lose it) much like most FSAs do. The problem is that many employers might not offer them. Check with your company.

Guest's picture

Heather, thanks for this informative post. My wife and I contribute to our FSA each month. Overall it has been an excellent benefit for us. We've had to do some tweaking on our estimate from year to year, but we seem to have it down pretty good now unless something completely unexpected pops up. Thanks for the tip on sunscreen. Just recently bought some that we'll submit a claim to be reimbursed.

Guest's picture

Thanks for the info but the part that FSA will pay for physician prescribed massage isn't 100% accurate. Not all FSAs will. My physician filled out prescription for me to have massage to treat migraines (it works!) because I can't take the meds.

While my state gives you a tax benefit (no sales tax on massage - save 7%), our FSA will not accept the prescription to reimburse us for the treatment. The reason they give is our health plan has to decline it first. Our health plan says it can't accept a bill without medical codes - which a massage place doesn't have unless its at a chiropractor office.

One option might be to find a good massage therapist at a Chiropractor's office - but my therapist is really good with migraines. She gets them and understands better than other massage therapists. So, no FSA for me :(

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