Flexible Spending Accounts (FSA’s) come in 3 different flavors of – general purpose, limited purpose, and dependent care.
First, a general purpose FSA reimburses out-of-pocket healthcare expenses not covered by medical insurance. Examples include deductibles, copays, dental expenses, vision expenses, and qualified parking and transit expenses.
Second, a limited purpose Flexible Spending Account is used in conjunction with an HSA (last week’s topic) can be used for only dental and vision expenses.
For instance, the limit for general and limited purpose FSA accounts is $2,850 for 2022.
Third, a dependent care Flexible Spending Account is used to pay for childcare expenses for children under age 12. Examples are daycare, nursery school, and summer camps. It is designed to cover daycare expenses that employees incur while they are at work during the day. In addition, if the taxpayer is married, the spouse must have an earned income, be enrolled as a full time student, or be actively looking for work.
Tax Benefits of Flexible Spending Accounts
Furthermore, the contribution limit for dependent care FSA is $5,000 per year. Luckily, contributions are not subject to federal income tax, Social Security and payroll taxes. If you are in the 22% tax bracket, total savings can be around 30%. The math is: 22% income tax + 6.2% Social Security tax + 1.45% Medicare tax = 29.65% total.
Finally, the Flexible Spending Account is a use it or lose it account, meaning any money left over at the end of the year was forfeited. But in 2021, the laws were changed. Employers can allow a maximum of $550 in unused funds in a health related FSA to be rolled over to the following year. Or employees can have a grace period of 2 and half months to use the money.
Flexible Spending Accounts are a great way to put your money to work. What questions do you have about FSA’s?