Have you recently opened a flexible spending account through your employer? While there are plenty of great benefits to opening and contributing to such an account, there are also flexible spending account rules to consider.
Many employees don’t know how to effectively leverage, contribute to, or use their account to its full potential. In this brief write-up, we’ll provide some of the basic rules or principles to follow so you can enjoy the full benefits of a flexible spending account.
What is a flexible spending account?
A flexible spending account, also known as an FSA, is a tax-advantaged healthcare fund. Employees who enroll can contribute pre-tax funds that can later be used towards out-of-pocket qualified medical expenses.
Flexible spending account rules typically allow employees to use their saved funds for copays, prescription costs, and deductibles, along with plenty of FSA eligible products.
FSAs come as part of an employee benefits package and though enrollment is optional, it should be heavily considered.
What are the benefits of a flexible spending account?
The average American family spends just over $6,000 in out-of-pocket medical costs, even with an employer-sponsored healthcare plan. An FSA is a simple and affordable way to balance out high out-of-pocket expenses.
When you sign up for an FSA, you’ll be asked how much money you want to contribute each pay period. The funds are automatically deducted from your paycheck and placed in your account, tax-free!
If you already purchase several FSA-eligible products or pick up eligible prescriptions on a regular basis, use this calculator to get an idea of how much you can save by opening an FSA.
Flexible spending account rules to know
Now, one important flexible spending account rule to keep in mind is that you are limited to contributing $2,750 per year (limits may adjust for 2022). This is an often overlooked consideration regarding flexible spending account rules. However, if your spouse has their own flexible spending account through their own employer, they too can contribute up to $2,750 into their own FSA, essentially doubling the amount of tax-free funds you can use towards certain health care expenses.
Another flexible spending account rule or benefit is that this money can go towards qualified medical expenses for you, your spouse, and for your dependents. As your family grows, you may want to consider an increase in your FSA contributions (if you’re not already maxed out).
One flexible spending account rule that could pose to be an issue is that you generally must use the money in your account within the given year, although some account allow up to a certain amount to be carried into the next plan year. As this is a use-it-or-lose-it type account, try and plan ahead as best as possible.
To do this, we recommend calculating your past medical expenses over a three to four-year period, finding the average, and using this as a guide for your contributions. Bear in mind, some employers offer rollover or grace periods, so check with your employer on their specific policies before making a final decision.
Lastly, be aware that there are some specific flexible account spending rules addressing when you can enroll. Employees are permitted to enroll in a flexible spending account:
- Based on their New Hire Waiting Period
- During an Open Enrollment period,
- During Initial Enrollment (if your employer sets up a new FSA plan)
- After a Qualifying Life Event (such as giving birth or getting married, depending on the type of account)
Refer to your employer to learn more about these enrollment periods and other flexible spending account rules pertinent to your company’s guidelines.
Save with an FSA
An employer-sponsored flexible savings account can save you and your family a substantial amount of money throughout the year if used correctly.
By paying careful attention to flexible spending account rules, you can maximize the effectiveness of these tax-advantaged savings accounts and minimize your out-of-pocket health care costs.