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    • Who benefits from a Flexible Spending Account (FSA)?
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    Who benefits from a Flexible Spending Account (FSA)?

    Umito Posted on

    A Flexible Spending Account (FSA) is an employer-sponsored benefit that allows employees to contribute their pre-tax income to cover qualified medical and dental expenses. Contributions reduce taxable income, which can lead to tax savings. FSAs can also be used for dependent care expenses if the employer offers a Dependent Care FSA.

    Key takeaways

    • An FSA is a tax-free account available to employees.
    • An FSA account is designed to pay for qualified medical and dental expenses.
    • FSA account contributions have an annual limit determined by the IRS.
    • Contributions are exempt from federal income tax, unemployment tax, Social Security, and Medicare.
    • The FSA owner, their spouse, and qualified dependents are eligible for the account.

    FSA contributions

    FSA contributions have an annual cap and are adjusted based on changes in cost of living by the IRS each year.

    The FSA contribution limit in 2025 is $3,300, an increase of $100 from 2024.

    Contributions are exempt from federal income tax, federal unemployment tax, Social securityAnd Health insurance taxes. To qualify for tax-exempt status, distributions from an FSA must not exceed contributions in a given calendar year, and funds must be spent on eligible medical expenses.

    Medical coverage

    FSAs generally operate on a “use it or lose it” basis. This means that unused funds at the end of the plan year are forfeited, although some plans may offer a grace period or allow a small rollover:

    Some employers offer a grace period of up to 2 1/2 months after the end of the year, giving employees more time to use their remaining FSA balance. Alternatively, employers can allow a carryover of up to $660 for 2025 to the following year.

    Most cosmetic procedures, such as teeth whitening, facelifts or liposuction, are not covered. However, some illnesses or accidents result in physical injuries that can be treated with surgeries and procedures generally considered cosmetic. FSA funds can be used to finance these specific cosmetic surgeries because they are performed to treat a medical problem.

    Who can use FSA funds?

    FSAs can cover a wide range of eligible medical, dental, and dependent care expenses as long as they are necessary and not reimbursed by insurance. These include:

    • Medical and dental expenses: Doctor visits, dental care (e.g., artificial teeth), prescription medications, bandages, smoking cessation programs, and therapy.
    • Dependent Care: For a dependent care FSA, funds can cover daycare, preschool, or elder care for eligible dependents.

    However, a dependent with a gross income above $4,400, files a joint return or can be claimed as a dependent on someone else’s return is not eligible.

    If the plan is designated as a dependent care FSA to cover the cost of child or dependent care, participants cannot use the plan to pay for qualified medical or dental expenses.

    Advantages and restrictions

    Expenses are considered qualified and nonqualified in flexible spending accounts. The IRS or the employer’s plan administrator can verify what is a valid expense.

    Qualified and Nonqualified FSA Expenses
    What is covered What is not covered
    Abortion and birth control Babysitting and childcare
    Acupuncture Controlled substances
    Artificial teeth Cosmetic surgery (not related to the treatment of a disease)
    Dressings Diaper Services
    Breast pump Funeral costs
    Chiropractor Hair removal
    Addiction Services Hair transplant
    Hearing aids Health Club Fees
    Long-term care Maternity clothing
    Oxygen Medicines without a prescription
    Smoking Cessation Programs Nutritional supplements
    Therapy Swimming lessons
    Vasectomy Teeth whitening
    X-rays Weight loss programs

    What is the purpose of a flexible spending account?

    Flexible spending accounts are tax-advantaged savings accounts that help people reduce their tax obligations while saving for eligible medical expenses, including those not covered by insurance. Plans are established and administered by employers. The IRS determines FSA contribution limits each year.

    What is the difference between a Flexible Spending Account (FSA) and a Health Savings Account? (HSA)

    FSAs and HSA are both pre-tax benefits offered by employers, but they differ in several key ways. FSAs can be used for a variety of qualified expenses (including dependent care), but are subject to the “use it or lose it” rule. FSAs do not carry over to the following year (unless the employer offers a grace period or carryover option). HSAs are only available with High Deductible Health Plans (HDHP). Funds in an HSA can be rolled over from year to year. HSAs also offer tax-free withdrawals for qualified medical expenses, as well as tax-deductible contributions.

    Who benefits most from an FSA?

    FSAs are ideal for employees with predictable health care or dependent care expenses, such as those with ongoing prescriptions, dental care, or dependent children in day care. Employees contribute to an FSA by reducing their taxable income and reducing their overall tax liability. However, it is essential to plan ahead and avoid overcontributing, as unused funds could be lost at the end of the year. If you have irregular medical expenses or large unexpected costs, consider an HSA or review your health coverage options.

    The essentials

    A Flexible Spending Account (FSA) can provide employees with significant tax savings, providing a tax-free way to pay for medical, dental, and dependent care expenses. By contributing to an FSA, employees can reduce their taxable income while saving for expenses not covered by insurance. However, be aware of contribution limits and the “use it or lose it” rule to make the most of this benefit.

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