Knowing the facts about a FSA is important when signing up for health insurance. Depending on a person's healthcare costs, an FSA can help save money on related costs. It is important to gauge how much to save in a FSA since the funds do not carry over from year to year. FSAs provide important tax benefits so it is important to know how to take advantage of these tax breaks.
What Is a FSA? A FSA is a savings account that employers offer to allow employees to save money on healthcare and dependent care expenses. Money that is saved in a FSA lowers a person's taxable income. For example, if someone makes $50,000 a year and then saves $20,000 in an FSA, he or she will only pay taxes on $30,000 as taxable income. Because money put in a FSA is not taxed, it has more buying power. Employers determine the amount of FSA contributions. The Internal Revenue Service has maximum limits on how much can be saved in a FSA account. This limit differs for healthcare expenses and dependent care expenses. Some experts recommend not using a FSA unless there are any ongoing health conditions. If there aren't any ongoing health issues, then a person may be in danger of forfeiting the FSA savings if it's not fully used.
The Best Way to Use FSA Funds FSAs are best used for co-payments, deductibles and prescriptions. Additionally, they can be used for vision and dental expenses as well as coinsurance. FSAs cannot be used towards health insurance premiums. Consider the medical supplies that a diabetic would need to purchase every month, such as needles and test strips. This person can put an allocated amount of money in an FSA account and then spend that during the year on diabetic healthcare supplies. All of the money used in this situation will not be taxed and provides considerable savings for this individual. Even though going to the gym provides health benefits, FSA funds cannot be used to pay for gym memberships.
How to Determine What to Contribute to a FSA FSA contributions happen during open enrollment for health insurance. It is important to determine the amount of money that will be used throughout the year. Insurance companies provide suggestions on how to allocate FSA funds. Enrollees should look at items, such as co-pays, dental expenses and prescription medication costs. This helps people figure out how much to save towards their FSA. Some employees have structures in place so that FSA enrollees do not lose their funds from one year to the next. In some cases, the amount carried over to the next year is not the entire amount. Additionally, employees offer grace periods within which enrollees could finish spending their unused FSA funds.
Is a FSA a Good Choice? This is a personal decision. FSAs do provide tremendous tax benefits. However, relatively healthy people without a need for medications may not benefit from one. It is important to read the health insurance manuals provided by employers to find out what is covered under the healthcare plan. Finding out how much will be required out-of-pocket is probably the best way to decide whether or not to enroll in a FSA.Learn more about Personal Banking