Pros & Cons Of Opening A Flexible Spending Account
Flexible spending accounts (FSAs) are associated with employer-sponsored health insurance plans. They allow you to divert a tax-deferred portion of your earnings into the account, which you can use to pay for certain healthcare-related expenses, including copayments and deductibles, and dependent-care costs. Money in an FSA must be used by the end of the plan year. However, employers may offer a grace period of up to two and a half months through March 15 of the next year.
What Are the Pros of Flexible Spending Accounts?
FSAs offer several significant benefits for employees:
One of the key advantages is that funds contributed to a flexible spending account come out of your earnings before taxes, which lowers your taxable income. You take home more money because your employer deducts less in taxes from your paycheck.
FSAs can be used for healthcare-related expenses that are not covered by health insurance, such as preventative testing, over-the-counter medications, and travel vaccines. These funds can also be used to cover deductibles and copays, and for certain authorized dental and vision expenses.
Flexible spending account funds are available for use immediately. You pledge a certain amount at the beginning of the year, which is taken gradually from your paychecks throughout the year. The full pledged amount is available to you at once, at the beginning of the plan year.
Many FSAs issue debit cards to participants. This is a convenient system that allows you to pay for your expenses directly.
What Are the Cons of FSAs?
There are certain disadvantages you should consider before opening a flexible spending account:
You are required to use the money in your FSA by the end of the plan year. In some cases, employers may allow you to roll over up to $500 to the next year, or they may offer a grace period for use of funds. You forfeit any FSA funds you have not used within the time limit.
FSAs are tied to your employment. If you leave your job for any reason, you lose your benefits. If you are suddenly laid off through no fault of your own, the funds remaining in your flexible spending account go to your employer.
The IRS limits individual flexible spending account contributions to $2,750 as of 2020. Working spouses can contribute to their own FSAs, if offered through their employers.
You can only sign up for an FSA during open enrollment. If you miss the deadline, you have to wait until the following year, unless you have a qualified change in family status, such as a birth, adoption, or marriage.
If you pay for medical expenses out of your FSA, you cannot deduct those expenses when you file your taxes. If you are using a dependent-care FSA, you will not qualify for the dependent-care tax credit.
If you need help deciding whether to open a flexible spending account, consult with our experienced agent. We can help you determine if an FSA is the best option for you.