As the end of the year comes to a close, you may need to make certain decisions relating to your employer-provided health care benefits. If your employer offers a Health Flexible Spending Arrangement (FSA), you might have questions about how an FSA works and whether it makes sense for you to participate. Below are answers to some frequently asked questions about FSAs.
1. What is the purpose of a Health FSA?
The purpose of a Health FSA is to provide a way for employees to set aside a portion of their salary, before taxes are withheld, to pay for health care expenses.
2. What is the benefit of an FSA?
Even if you have health insurance, it is likely that you will have medical expenses that you will have to pay for out-of-pocket (e.g., deductibles, medical and prescription copayments).
A Health FSA allows you to contribute a portion of your income, pre-tax, into an account set up on your behalf. Because the money is not taxed, you can save a significant amount over the course of a year. This money then can be used to reimburse you for certain medical expenses. But keep in mind, the money in your Health FSA can only be used as reimbursement for eligible medical expenses.
3. How does it work?
Before the start of each plan year, you must elect how much to put aside for the coming year. It is important to note that any unused money remaining in your account at the end of the year will be forfeited. So you will want to do your best to estimate your medical expenses for the year. The amount you choose will be deducted from your paychecks over the course of the year.
Typically, you receive money from your Health FSA account in the form of a reimbursement for an eligible medical expense. For example, if you pay the copayment while filling a prescription at the pharmacy, you can submit a receipt to the plan and be reimbursed from your FSA account.
Some FSA plans, however, may choose to issue debit cards to participants that automatically deduct eligible medical expenses at the time of service (e.g., you can use your debit card at the pharmacy to cover a prescription copayment).
4. What expenses can be reimbursed by an FSA?
Money set aside in a Health FSA can be used to pay only for certain medical expenses incurred by you, your spouse, or your dependents. Some examples include:
• Doctor visit copayments
• Prescription drug copayments
• Dental and vision costs
• Medical equipment (e.g., crutches or wheelchair)
• Medical devices (e.g., blood sugar kits)
• You may not use your FSA money as reimbursement for the cost of health insurance premiums
You should contact your plan directly if you have a question about whether a specific medical expense is eligible.
5. How much can you contribute per year?
In 2017, the maximum amount an employee can contribute to a Health FSA is $2,600 per year. This maximum amount is set by the Internal Revenue Service and may change in subsequent years.
6. What if you don’t use all of the money in your account by the end of the year?
A Health FSA is a “use-it-or-lose-it” account, which means that any unused money remaining in your account at the end of the year will be forfeited.
Your plan may, however, offer (a) a grace period of up to 2.5 months after the end of the plan year during which claims incurred during the grace period can be reimbursed from contributions made in the prior plan year, or (b) permit employees to carry over up to $500 in unused contributions into the next year.
You will have to check with your FSA plan to find out whether your plan offers one of these options.
For additional information on a Health FSA or other benefits programs, contact one of the Employee Benefits attorneys at Willig, Williams & Davidson at 800-631-1233.