Considering an FSA? Here are 8 things you need to know

Healthcare Flexible Spending Accounts (FSA) are tax-advantaged healthcare accounts that let you use tax-free money to pay for eligible medical expenses. Millions of Americans use an FSA to help reduce their out-of-pocket healthcare costs by lowering their taxable income through pre-tax payroll deductions.

Before you decide whether an FSA is a good choice for you, here are eight things you need to know.

#1 Contributions are tax-free

An FSA allows you to set aside money from your paycheck on a pre-tax basis to pay for eligible healthcare expenses. Because contributions are deducted before federal income and payroll taxes, you effectively reduce your taxable income and keep more of your earnings.

For example, if you contribute $2,000 to your FSA and you are in the 22% tax bracket, you could save around $440 in federal income taxes alone — plus additional savings on Social Security and Medicare taxes.

#2 Your entire annual balance is available on day one

Unlike a Health Savings Account (HSA), where funds are available only as you contribute, your full FSA election amount is available on the first day of the plan year. This means you can use the entire balance for eligible expenses right away, even if you have not contributed the full amount yet.

For the current contribution limits, visit this page.

#3 After annual enrollment, you can only change elections with a “qualifying life event”

Once you set your FSA election during open enrollment, you generally cannot change it until the next enrollment period. The exception is if you experience a qualifying life event such as marriage, the birth of a child, or a change in employment status.

#4 An FSA lets you pay for more than you think

FSAs cover a wide range of eligible medical expenses — from doctor copays and prescriptions to dental and vision care. You can also use your FSA for thousands of other products and services, including over-the-counter medications, first-aid supplies, sunscreen, and more.

Check out the FSA Store for a full list of eligible products.

#5 You can pay for eligible expenses directly, or get reimbursed later

With an FSA, you can use your benefits debit card to pay for eligible expenses at the point of sale. If you pay out-of-pocket, you can submit a claim to get reimbursed for eligible expenses.

#6 FSAs let you pay for your spouse and eligible dependents too

Your FSA is not just for you. You can use your FSA funds to pay for eligible medical expenses for your spouse and qualifying dependents, even if they are not on your health plan.

#7 FSAs are ‘use it or lose it’ accounts

Generally, any money left in your FSA at the end of the plan year is forfeited. That is why it is important to estimate your healthcare expenses carefully when setting your annual election.

However, your employer may offer one of the extensions described below.

#8 Many organizations offer extensions

While FSAs are generally use-it-or-lose-it, many employers offer either a grace period (an additional 2.5 months to use remaining funds) or a carryover provision (allowing you to roll over a limited amount to the next plan year). Check with your employer to see which option, if any, is available to you.