Flexible Spending Accounts (FSA) allow employees who get health benefits at their jobs to set aside wages for health care expenses during the year. The money isn’t taxed when it goes into the accounts or when it’s spent on qualified medical expenses like co-payments for doctor visits and prescription drugs. They’re intended to defray predictable medical expenses during the year.
FSAs are usually funded through voluntary salary reduction agreements established through employer benefit plans. Currently you can set aside $2,500 per year or any lower amount set by your employer’s plan.
The spending deadline for using your FSA is December 31, unless your employer allows the IRS grace period, which is March 15. However, thanks to a Congress ruling in October 2013, up to $500 can now be protected from the FSA use-it-or-lose-it rule for the next benefit year. The only catch is that employers can either offer the March 15 grace period or the rollover option. If you have an FSA, speak with your FSA administrator to find out your options.
You can have both an FSA and itemize deductions, but you cannot apply your FSA expenses when itemizing. This is considered double-dipping, and is not allowed with the IRS.
A benefit of having an FSA is that there are no reporting requirements on your income tax return.
Reminder: If you itemize your deductions, medical expenses now must be a minimum of 10 percent of your adjusted gross income (AGI) in order to be deductible.
Most people have insurance co-pays and exams not covered by their insurance. These, as well as medical prescriptions can be taken from your FSA. Account holders may use a special debit card for these expenses or get reimbursed later by their employers.
A complete list of FSA-eligible expenditures can be found on page 5 of the IRS Publication 502 (PDF). See your FSA administrator for a complete list of what your plan will reimburse.
Here are some other common uses:
Vision – exams, glasses, contacts, Lasik
Dental – exams and cleaning (excludes whitening), orthodontics, dental guards
Certain alternative treatments, such as acupuncture and chiropractic sessions
Mileage to appointments (for 2013, the IRS allows 24 cents per mile; for 2014, it’s 23.5 cents per mile)
Over-the-counter medications, but only if prescribed by your doctor (insulin does not require a prescription, but qualifies according to the IRS, page 16 of Publication 969)
Common expenses that do not qualify for an FSA distribution:
Health insurance premiums
Long-term care coverage or expenses
Amounts that are covered under another health plan
For more information, see your FSA administrator. Also, consult IRS Publication 969 (PDF), page 15 on Flexible Spending Arrangements.