Chelsey Tucker graduated with a Bachelor of History degree from Metropolitan State University in 2019. She now writes about insurance with her specialty being life insurance and has been quoted on Help Smart Phone and MEL Magazine.

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years. He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like Reviews.com.

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Reviewed by Daniel Walker
Licensed Auto Insurance Agent

UPDATED: Mar 19, 2020

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The lowdown...

  • A medical Flexible Spending Account (FSA) is a tax-free method of saving money from your wages towards qualified medical expenses
  • Contributions to an FSA can be made by both employer and employee, although normally it is the employee that adds the funds
  • Most items that are considered valid medical tax exemptions are also qualified expenses for an FSA
  • Qualifying verified expenses can be paid using the FSA funds once there is enough available and are tax-free up to the IRS annual limits
  • $500 dollars of the amount saved from last year will roll over to the next and many employers offer a two and a half month grace period to use the funds saved from the previous year

Flexible spending plans are a way to save money for medical expenses that are deducted pre-tax. You never see the money, so it makes it easier to save over the course of the year.

Amounts over $500 dollars do not carry over to the next year, but an FSA can give you a solid foundation of financial support for covering the costs of necessary medical services, or dependent care.

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What is a Medical Flexible Spending Arrangement?

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An alternative to trying to save money on your own for medical expenses not paid by a group health insurance policy is the establishment of a Flexible Spending Account, or Arrangement.

This  FSA is money that is set aside free of taxation that can be sued to cover expenses during the year, such as:

  • copay
  • eyeglasses
  • dental work
  • deductibles
  • more

An FSA can also be used to help pay for dependent care. They are generally not allowed if you already have group health insurance coverage and an HSA.

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Is an FSA employer or employee paid?

An employer is the one that established the FSA account for an employee. An employer is allowed to contribute funds, but it is primarily used for the tax-free savings of en employee to place funds accessible that are earmarked for medical expense use.

The amount of contribution by an employer will vary. Some employers will not do anything beyond setting up the account.

What are covered expenses?

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There is a long list of covered expenses when it comes to the money contained in an FSA account. Receipts and documentation will need to be saved unless the employer waives the requirement. It is still a good idea to save receipts for your own records.

A few of the covered expenses are:

The list of covered expenses fairly well falls in line with the items that the IRS deems tax deductible. You can find the list here.

Limits of Savings Allowed By IRS

The limits of FSA savings were established to be $2,500 dollars for medical savings per year and $5,000 dollars for dependent care expenses.

Adjustments will continue to be made that allow for cost-of-living increases.

With married couples, if one spouse does not work enough to cover their end, the FSA will be limited to what the spouse earns.

Spouses that are disabled, or full-time students are exempt from this standard. Anything over the limits set by the IRS will be subject to taxation if withdrawn. There are specific forms for child and dependent care.

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How does FSA coverage work?

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Your employer will begin to deduct the desired amount out of your wages and add to your FSA account.

The money can be used as it accumulates for any and all qualifying expense. Some employers will add a percentage of funds to your account, while others do not. It is not a mandatory benefit. It is fully voluntary on both parties.

The requisite paperwork has to be done, or receipts kept and turned over to the employer after the expenses are paid. Some employers use a debit card, while others pay by other means.

Grace Periods

The new healthcare rules have allowed at least a small portion of your available FSA to roll over to the next year.

You can carry as much as $500 dollars over, which is better than previous rules. It still may leave you standing at a loss if you have not used much of what is saved.

Many employers have turned to offering a two and a half month grace period to use funds from the previous year.

This allowance could realistically give you until March of the next year to use the saved funds.

Creating a strategy to pay for the high cost of medical care is essential to getting the care you and your family need. Using every available option will help minimize what you pay out-of-pocket.

An FSA ID a practical tax-free option to allowing you better control over your medical service and dependent care expenses. Contact health insurance professionals today and find out if an FSA is the right choice for you or your business.

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