A flexible spending account, or FSA, is a great tax-saving benefit many employers offer for managing health care expenses.
But unlike a health savings account (HSA), you can forfeit your funds in your FSA if you don’t use them by the end of the year, or at least your employer’s grace period. Rather than let dollars go to waste, it’s important to take stock of any money in your FSA at the end of the year and make a plan to spend it before it expires, whether on doctors’ visits or stocking up on medical supplies.
What Is an FSA?
An FSA is a tax-advantaged account designed to help users save on their health care expenses. Typically offered as an employer benefit, these accounts let you deposit pretax dollars from your paycheck and use the balance to cover qualifying medical expenses throughout the year.
[Related:Tips for Managing Medical Expenses]
It’s important to note that an FSA is not the same as an HSA, which is a similar tax-advantaged health care account.
“HSAs have higher annual contribution limits compared to FSAs. In 2023, the maximum annual contribution limit for an individual is $3,850 and $7,750 for a family. Unlike FSAs, HSAs have a roll over feature. Any unused funds in an HSA at the end of the year are not forfeited, they roll over and continue to accumulate providing for long term savings,” Michael Most, principal wealth manager at Savvy Advisors, said in an email.
Most notable here is the fact that FSA funds can expire if you don’t use them, so it’s important to carefully budget your deposits and make a plan to use what you save.
FSA Expiration and Grace Period
“Any funds remaining in FSAs at the end of the plan year (or grace period if offered by employer) may be forfeited, with some alternatives such as a carryover provision (up to $610 for 2023) or a grace period,” Most said.
That means that if you don’t use up the money you saved by the end of the year, you could lose it entirely.
According to Lei Han, CPA and associate professor of accounting at Niagara University, most employers offer a grace period of up to two and a half months to use the money in your FSA after the year ends.
Before you sign up for an FSA benefit or deposit any money, be sure to ask your human resources department for specific details of your plan.
[Read: How to Get Help Paying Medical Bills.]
How to Spend Your FSA Balance Before It Expires
Because the money you deposit into an FSA is pretax, it makes sense for those with regular medical expenses to take advantage of the benefit. But even with careful planning, you could end up overestimating the amount you’ll spend and risk forfeiting some of your hard-earned money.
If you reach the end of the year and find that you still have money left in your FSA, there are several kinds of purchases you can use it for. According to Most, eligible expenses can include:
— Prescription and over-the-counter medications.
— Medical supplies.
— Dental and vision expenses.
— Orthodontic treatment.
— Insulin and diabetic supplies.
— Medical equipment.
If you have extra money, Han recommends scheduling any appointments you might have been postponing — like teeth cleaning or an eye exam. You can spend money left over on things like over-the-counter drugs, vitamins, first aid supplies and more that you will use at home throughout the year, she says.
Han also recommends checking out FSAstore.com, where all the listed products can be purchased with FSA funds. Options include personal care items you might not expect — like a massage gun or fitness-tracking ring.
[Related:10 HSA Eligible Expenses]
Tips for Managing Your FSA
The fact that FSA funds can be forfeited makes budgeting how much to save in these accounts difficult. Most recommends aiming low to avoid making extraneous purchases to use up extra money at the end of the year.
“It’s better to be conservative and slightly underestimate your expenses rather than overestimate and risk losing a portion of your funds by the end of the plan year,” he said.
Han suggests using your previous year’s medical expenses as a guide for how much you will spend in the new year. While not a foolproof system, this can be especially useful for those with chronic medical conditions who regularly spend on medical supplies and procedures and can count on those costs coming up again in the future.
When leveraged correctly, an FSA can help you save on health care by allowing you to allocate pretax money towards those purchases; you just have to plan carefully to avoid losing any cash.
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Use Your FSA Balance Before it Expires originally appeared on usnews.com
