What Is an FSA?

An FSA, or Flexible Spending Account, is a savings account that allows employees to set aside a portion of their paycheck to cover eligible medical expenses, which, in turn, are not taxed. For instance, an employee earning $75,000 annually could set aside $2,000 in their FSA, reducing their taxable income to $73,000. The $2,000 set aside can be used directly for FSA-eligible products and services. By using these tax-free dollars, individuals can pay for a wide range of healthcare costs, including, but not limited to medical, dental, vision care, and skincare. Thousands of FSA eligible products can be purchased at retailers such as Amazon, Costco, CVS, and Target just to name a few. Many people often associate FSAs solely with services, unaware that thousands of everyday expenses they already purchase are also eligible.

Why Do We Have an FSA?

The United States government found that Americans are spending more than $600b a year on out of pocket healthcare expenses. This translates to about $1,600 per person. Of that total cost, around $400 are spent on FSA eligible products, around $800 on insurance co-pays, and around $400 on out-of-network expenses like chiropractor or counseling services. The expected out of pocket expenses for a family of 3 in the US is close to $5,000.

To help reduce the impact of healthcare expenses, the IRS (Internal Revenue Service) created a few supporting programs, one of which is the FSA program. This program allows Americans to set aside money from their salary for healthcare expenses, which are not taxed. These funds can be used on thousands of eligible FSA products and services, many of which people may not realize are eligible.

Why Do Employees Opt Out of an FSA?

During open enrollment, many employees either aren't aware of what an FSA is or choose to opt out because they don't recognize its value. Additionally, some employees who have used FSAs in the past may have had negative experiences, such as not getting enough value or losing unused funds due to the "use-it-or-lose-it" rule. This is likely one of the most common reasons employees shy away from FSAs. However, FSAs are crucial for saving money, and most people should consider enrolling. By using pre-tax money for eligible healthcare expenses, employees can reduce their taxable income and save money overall. FSAs offer a valuable opportunity to purchase a wide range of healthcare products and services while paying less in taxes. Understanding how to effectively manage an FSA can help avoid previous pitfalls and ensure that employees maximize their savings.

How Does an FSA Work?

An employer is enabling their employees to open an FSA through an FSA provider, also known as a Trusted Third Party (TPA). Once a year, usually two months before the benefit year starts, an employee can choose to open an FSA during the open enrollment period. If they opt in, they decide how much of their salary to contribute to the FSA. This amount, capped at $3,200 by U.S. regulations, is deducted from their paycheck before taxes throughout the year. These set-aside funds can be used for a variety of FSA-eligible products and services, such as personal hygiene items, over-the-counter medications, and counseling services purchased during the year.

Usually, the TPA will send the employee a dedicated debit card that can be used to pay for eligible expenses directly from the FSA funds. This card has a special ID that is recognized by retailers and providers who sell FSA eligible products and services. For example, your dentist probably accesses the TPA debit card, but your barber will not.

An alternative option for using FSA funds, is by purchasing products and services through any other means (like your personal CC), and filing a claim with an itemized receipt through the TPA website. The TPA will then review the claim and substantiate a reimbursement if the items submitted are eligible.

Silver automates the entire process, from finding eligible expenses to claiming your reimbursements. By logging into your retail accounts, Silver scans all existing purchases for FSA eligibility, automatically creates the claim, and submits it to the employee's TPA provider.

How Do You Calculate Your Expected Savings?

In order to calculate how much money you can save if you have an FSA…

Decide how much you will contribute to your FSA up to the maximum limit set by the IRS, which is $3,200 for 2024.
Determine your tax bracket. FSA contributions are not subject to federal income tax, state tax, Social Security tax, or Medicare (FICA) tax.

To further explain, here is an example…

Annual Contribution to FSA: $2,500

Tax Bracket: 22% Federal, 7.65% Social Security and 0.5%Medicare (FICA), and 6% state

Tax Savings:

$2,500 * (22% + 7.65% + 1.45% + 6%) = $2,500 * 0.371 = $927.50 every year

What Are Important FSA Terms and Policies You Should Be Familiar With?

Use-It-or-Lose-It Rule: Any unused funds in your FSA at the end of the plan year may be forfeited unless your plan offers a grace period or carryover option.
Runout Policy: The FSA runout policy provides employees a specific period, usually 90 days after the plan year ends, to submit claims for expenses incurred during that plan year. During this runout period, employees can submit receipts and documentation for reimbursement of eligible expenses incurred before the end of the plan year. This period does not apply to new expenses incurred after the plan year ends.
Grace Period: Some plans offer a grace period of up to 2.5 months after the plan year ends to use the remaining funds.
Carryover Option: Some plans allow you to carry over up to $610 (as of 2024) of unused funds to the next plan year.

It is important to note that employers can offer a Grace Period, or a Carryover Option, but no plan can offer both.

Eligible Expenses: Make sure you are familiar with the expenses covered by your FSA. The IRS offers resources to help determine FSA-eligibility and Silver provides multiple lists of eligible expenses.
Letter of Medical Necessity: A letter of medical necessity is needed when you are seeking reimbursement from your FSA for products or services that are not typically covered as standard eligible expenses. These might include items or treatments that are generally considered non-essential, such as massage therapy, specialized equipment, dietary supplements, or cosmetic procedures. The letter helps to demonstrate that these expenses are required for the treatment of a specific medical condition, thereby qualifying them for FSA reimbursement.

What Are Common Questions About FSA?

1. What Expenses Are Eligible for FSA Reimbursement?

There are thousands of products and services that are FSA eligible. Some common eligible expenses are sunscreen, prescription glasses, contraceptives, acne treatments, and tampons. For more information on eligible expenses, check out these resources on Silver’s resources page.

2. Can I Use My FSA Funds for My Spouse and Dependents?

Yes, FSA funds can be used to pay for eligible medical expenses for your spouse and dependents, as long as they qualify as dependents on your tax return.

3. What Happens If I Don’t Use All the Money in My FSA?

Depending on your employer's plan, unused funds may be forfeited at the end of the plan year (use-it-or-lose-it rule). However, some plans offer a grace period of up to 2.5 months or allow you to carry over up to $610 to the next plan year.

4. Can I Change My FSA Contribution Amount During the Year?

Generally, you can only change your contribution amount during the open enrollment period or if you experience a qualifying life event, such as marriage, divorce, birth or adoption of a child, or a change in employment status.

5. How Do I Submit a Claim for Reimbursement?

To submit a claim, you generally need to fill out a claim form and provide receipts or other documentation of the expenses. However, with Silver, the process is much simpler. Just log in to your accounts such as Amazon, Costco, and CVS, and Silver will scan your purchases, identify your FSA-eligible expenses, compile the claim, and submit it to your provider on your behalf, eliminating the hassle of tracking down individual receipts.

6. Is There a Limit to How Much I Can Contribute to My FSA?

Yes, the IRS sets annual contribution limits for FSAs. For 2024, the limit is $3,200.

7. Can I Use My FSA for Over-the-Counter Medications?

Yes, over-the-counter medications are eligible for reimbursement without a prescription. This also includes menstrual care products.

8. What Is the Difference Between an FSA and an HSA?

An FSA is typically offered by employers and must be used within the plan year (with some exceptions). An HSA is tied to a high-deductible health plan (HDHP) and allows funds to roll over year to year, with additional investment options.

9. Can I Have Both an FSA and an HSA?

Generally, you cannot have a standard FSA and an HSA simultaneously. However, you can have a limited-purpose FSA (LPFSA), which only covers dental and vision expenses, alongside an HSA.

10. Are There Any Penalties for Using FSA Funds for Ineligible Expenses?

Yes, if you use FSA funds for ineligible expenses, the amount must be included as taxable income, and you may be subject to additional penalties.

11. Do I Have to Keep Receipts for FSA Expenses?

Traditionally, keeping receipts for FSA-eligible expenses is essential. However, with Silver, this is no longer necessary. Simply log in to your accounts, and Silver will handle the rest, tracking and submitting your FSA claims on your behalf.

12. What Is an FSA Card and How Does It Work?

An FSA card is a debit card linked to your Flexible Spending Account (FSA) that allows you to directly access your FSA funds to pay for eligible healthcare expenses.When you enroll in an FSA, your employer or FSA administrator provides you with an FSA card. You can activate the card following the instructions provided, similar to any standard debit card. When you incur eligible healthcare expenses, you can use the FSA card to pay at the point of sale, such as pharmacies, doctor's offices, or approved retail stores. The card automatically deducts the amount from your FSA balance.The card can only be used for expenses that qualify under FSA guidelines, such as medical copays, prescriptions, dental care, and other approved healthcare products and services. Many FSA cards are programmed to work only at approved merchants and for eligible expenses, reducing the need for manual claims submission. Although the card streamlines the payment process, you should keep receipts and documentation of your purchases in case the FSA administrator requests proof that the expenses are eligible. The card will only allow you to spend up to the current balance in your FSA. Additionally, there may be a daily transaction limit depending on the plan's rules.

13. How Can I Check My FSA Balance?

You can check your FSA balance by logging into your account on your FSA administrator’s website or app, or by calling the customer service number provided by your FSA administrator.

14. What If I Leave My Job?

If you leave your job, your FSA generally ends on your last day of benefits from your employer. This means you can only use your FSA funds for expenses incurred while you were still employed. However, unless you elect COBRA continuation coverage for your FSA, you won't be able to use any remaining funds for expenses incurred after your employment ends. Understanding this timeline is crucial to ensure you maximize the use of your FSA before your coverage expires.

15. Can I Roll Over Unused FSA Funds to the Next Year?

Some plans allow a carryover of up to $610 of unused funds to the next plan year. Alternatively, some plans may offer a grace period of up to 2.5 months to use the remaining funds. Check with your employer for specific details.

16. How Does the FSA Grace Period Work?

The grace period allows you to use funds from the previous plan year to pay for eligible expenses incurred during the first 2.5 months of the new plan year.

17. What Are the Pros and Cons of Having an FSA?

Having an FSA offers several advantages. One of the primary benefits is tax savings. Contributions to an FSA are made with pre-tax dollars, which reduces your taxable income and, consequently, your federal income tax, Social Security tax, Medicare tax, and potentially state tax. This immediate reduction in taxable income translates into significant savings. Additionally, FSAs provide immediate access to the full annual contribution amount at the start of the plan year, even though you fund it gradually through payroll deductions. This can be particularly helpful for managing large or unexpected medical expenses. FSAs also cover a wide range of eligible healthcare expenses, including copays, prescriptions, medical devices, and some over-the-counter items. Many plans offer FSA debit cards, which simplify paying for these expenses and reduce the need for reimbursement paperwork. Furthermore, some employers contribute to employees' FSAs, adding to your savings and making healthcare costs more manageable.

However, there are some drawbacks to consider. One significant con is the "use-it-or-lose-it" rule, where funds not used by the end of the plan year are forfeited, although some plans offer a grace period or limited carryover options. The IRS sets an annual contribution limit ($3,200 for 2024), which may not cover all your healthcare expenses. Additionally, there can be an administrative hassle involved, as you may need to submit receipts and documentation for reimbursement, and not all expenses are automatically covered. Another potential drawback is the restriction on changing contribution amounts mid-year unless you experience a qualifying life event. FSAs are also tied to your employer, so if you change jobs, you may lose access to your FSA and any remaining funds. Finally, not all healthcare expenses are eligible for FSA coverage, so you need to be aware of what qualifies to maximize your benefits.

Summary

In conclusion, having an FSA provides substantial tax savings and convenience for managing healthcare expenses, but it also necessitates careful planning and awareness of the rules to avoid losing unused funds. Silver simplifies the reimbursement process by automatically determining FSA-eligible expenses and eliminating the need to keep receipts, making it much easier for employees to maximize their benefits.

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