Maximizing Your FSA: How to Make the Most of Your Flexible Spending Account

A Flexible Spending Account (FSA) is one of the most underutilized yet powerful financial tools available to employees. FSAs allow you to set aside pre-tax dollars for eligible healthcare or dependent care expenses, reducing your taxable income and saving you money. However, FSAs come with specific rules and deadlines, so maximizing their benefits requires careful planning and attention to detail.

This guide will cover the essentials of FSAs, from how they work to common eligible expenses, and strategies to ensure you’re getting the most out of your account.

What Is an FSA?

An FSA is a special type of savings account that allows you to pay for certain healthcare or dependent care expenses using pre-tax dollars. FSAs are offered through employer benefit plans, and the money you contribute reduces your taxable income, leading to potential tax savings.

There are two main types of FSAs:

• Healthcare FSA
  Covers eligible medical, dental, and vision expenses for you and your dependents.
  
  
• Dependent Care FSA
  Covers eligible expenses related to the care of dependents, such as childcare, preschool, and elder care.

How an FSA Works

Each year during open enrollment, you decide how much money to contribute to your FSA for the upcoming year. The amount is deducted in equal installments from your paychecks throughout the year, but you can use the full elected amount for healthcare FSAs as early as the first day of the plan year. Dependent Care FSAs, however, require you to have contributed the money before you can use it.

There are some important rules to be aware of:

• Use-it-or-lose-it
  FSAs are subject to a “use-it-or-lose-it” rule, meaning you generally must use the funds by the end of the plan year or forfeit the remaining balance. Some employers offer grace periods or allow you to carry over a limited amount of unused funds, but this is not guaranteed.
  
  
• Contribution Limits
  For 2024, the maximum contribution limit for healthcare FSAs is $3,050. For dependent care FSAs, the limit is $5,000 per household (or $2,500 if married filing separately).

Benefits of an FSA

FSAs offer several advantages, primarily centered around tax savings:

• Pre-tax contributions
  FSA contributions are made from your pre-tax income, lowering your taxable income. This reduces the amount of federal, state, and Social Security taxes you pay.
  
  
• Immediate reimbursement
  With a healthcare FSA, you can access the full amount you’ve elected to contribute as early as the first day of the plan year, even if you haven’t yet fully funded the account through payroll deductions.

Common Eligible Expenses for Healthcare FSAs

Healthcare FSAs can be used for a wide range of out-of-pocket medical expenses. Some common eligible expenses include:

• Copayments, deductibles, and coinsurance
  These are the out-of-pocket costs not covered by your health insurance plan.
  
  
• Prescription medications
  Most prescription drugs are covered, as well as over-the-counter medications with a doctor’s prescription.
  
  
• Dental and vision care
  Expenses like braces, glasses, contact lenses, and eye exams are eligible.
  
  
• Medical equipment
  Items such as crutches, blood pressure monitors, and even some home medical devices qualify.
  
  
• Mental health services
  Therapy, counseling, and psychiatric care are covered, along with medications prescribed for mental health conditions.
  
  
• Preventive care
  Vaccinations, annual check-ups, and screenings for conditions like cancer or heart disease can be reimbursed with FSA funds.

Common Eligible Expenses for Dependent Care FSAs

Dependent Care FSAs cover costs related to care for your children or other dependents while you and your spouse work. Eligible expenses include:

• Childcare or daycare
  This includes daycare centers, after-school programs, or nanny expenses for children under age 13.
  
  
• Preschool or nursery school
  While tuition for primary and secondary school is not covered, preschool and nursery school expenses qualify.
  
  
• Summer day camps
  Day camps (but not overnight camps) can be paid for with dependent care FSA funds.
  
  
• Elder care
  If you care for a parent or other dependent who is physically or mentally unable to care for themselves, the costs of their care are eligible.

Strategies to Maximize Your FSA

1. Plan Your Contributions Wisely

Since FSAs follow the “use-it-or-lose-it” rule, it’s important to carefully estimate your anticipated expenses for the year. Review your past healthcare or dependent care costs and consider any upcoming expenses, such as surgeries, prescription refills, or orthodontic treatments.

2. Track Your Eligible Expenses

Keep a running list of eligible expenses to ensure you’re using your FSA funds efficiently. Save receipts for any healthcare-related expenses or dependent care costs, and submit claims as soon as possible. Many FSA administrators provide debit cards for ease of use at the point of sale, but you may still need to keep documentation for IRS purposes.

3. Take Advantage of Over-the-Counter Purchases

Since 2020, over-the-counter medications and products like pain relievers, allergy medicines, and menstrual care products are eligible for reimbursement through healthcare FSAs, without the need for a prescription. Stocking up on these essentials can help you use up any remaining FSA funds before the deadline.

4. Use FSA Funds for Preventive Care

Preventive healthcare is not only a good practice for your overall well-being but also a great way to use FSA dollars. Schedule your annual physical, dental cleanings, and eye exams early in the year so you can take advantage of your available funds and catch any potential health issues early.

5. Look for Grace Periods or Carryover Options

Some employers offer grace periods—allowing you to use the funds for up to 2½ months after the plan year ends—or allow you to carry over up to $610 of unused funds to the next year. Be sure to check your employer’s specific FSA policy so you can avoid losing any unused funds.

6. Pair an FSA With a High-Deductible Health Plan (HDHP)

If you have an HDHP, pairing it with an FSA can be a smart way to cover out-of-pocket costs like deductibles and copayments while also saving on taxes. Some employers also allow you to use an FSA alongside a Health Savings Account (HSA), giving you more flexibility in managing healthcare costs.

How FSAs Fit Into Your Overall Financial Plan

FSAs are a useful tool, but they should fit into your broader financial strategy. While FSAs provide immediate tax savings, you must balance this with long-term savings goals, such as contributing to retirement accounts or saving for emergencies. Additionally, if you anticipate a major life change (such as the birth of a child or a change in employment), consider how this might impact your healthcare or dependent care costs and adjust your FSA contributions accordingly.

Common Mistakes to Avoid

• Overestimating Contributions
  Be conservative when estimating how much to contribute. While it’s tempting to max out your FSA, overcontributing could leave you scrambling to spend unused funds by year-end.
  
  
• Missing Deadlines
  The “use-it-or-lose-it” rule can lead to forfeiting funds if you don’t pay attention to deadlines. Mark important dates on your calendar, including any grace periods or carryover options.
  
  
• Not Using the Full Range of Eligible Expenses
  Many people underestimate the variety of expenses FSAs can cover. Review a full list of eligible expenses to ensure you’re using your FSA funds for things like medical equipment, mental health services, and even acupuncture or chiropractic care.

Conclusion

An FSA is a powerful way to save on healthcare and dependent care costs while reducing your tax burden. By understanding how FSAs work, planning your contributions carefully, and staying on top of eligible expenses, you can maximize the benefits and avoid leaving money on the table.

Whether it’s routine medical expenses or ongoing dependent care needs, an FSA can provide valuable financial relief. Make it a part of your overall financial strategy and use it wisely to get the most out of your benefits.