What is an FSA?
So, here’s what you need to know about FSAs, including how they differ from HSAs.
What is an FSA?
A Flexible Spending Account (FSA) is a savings account that allows employees to set aside pre-tax dollars for healthcare, dependent care, or “limited purpose” expenses, such as vision or dental care. An FSA may also be called a Flexible Spending Arrangement. What an FSA will pay for depends on the type of account.
Both employees and their employer can contribute to an FSA, but the IRS does limit how much an individual can contribute to their account per year. The amount an employer contributes does not affect the maximum amount that an employee can contribute. For health and limited purpose FSAs, the maximum is $2850 for 2022, and for dependent care FSAs, the maximum is $5000 for 2022.
Employees should keep in mind, though, that FSAs do not roll over from year to year. The IRS does give employers the option to extend a grace period for two-and-a-half months, and some plans allow up to $550 per year to rollover. But typically, any remaining FSA funds return to the employer once the plan year expires.
The tax-free advantage of FSAs is one reason why they are such a popular benefit. It essentially means that employees can save about 30% on qualified expenses.
What Expenses Will an FSA Cover?
Dependent care FSAs can be used to pay for licensed day care, adult dependent care providers, and summer camps.
Limited purpose FSAs typically cover dental and vision care, but there are some FSAs designed for commuter benefits and adoption services as well.
To be clear, though, there are no “universal” FSAs that cover all of the products and services mentioned above. Instead, the type of FSA dictates what qualifies as a reimbursable expense. That’s why most FSAs are not compatible with an HSA—but some are.
How Does an FSA Compare to an HSA?
FSAs are often confused with HSAs—or Health Savings Accounts—but there are some key differences:
- While both FSAs and HSAs allow employers and employees to contribute before taxes, the IRS sets a higher limit on HSA contributions.
- HSAs rollover from one plan year to the next while FSAs typically do not rollover. Keep in mind, though, that employers have the options to allow up to $550 per year to rollover and to extend a grace period of up to two-and-a-half months.
- FSAs are owned by employers, which means that individuals cannot set one up independently and that individuals cannot take their funds with them when they leave employment. HSAs, on the other hand, are owned by the individual and are portable.
- HSAs must be paired with a high-deductible health plan (HDHP), but FSAs have no such requirement.
For these reasons, you may be wondering if an employee can have both an FSA and an HSA at the same time. Yes, but only under limited circumstances. According to the IRS, health FSAs are considered “other health coverage,” which makes them incompatible with an HSA. However, limited purpose, dependent care, and commuter benefit may be paired with an HSA.
Both of these tax-advantaged accounts can help employees save significantly on qualifying expenses. That’s why they make such a competitive benefit for employers.
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