If you get health insurance through your employer, but are looking at your other options during open enrollment, here’s something to keep in mind: The IRS announced flexible spending account (FSA) contributions for 2018 are being raised to $2,650, an increase of $50 from 2017.
What is a flexible spending account?
In the face of rising healthcare costs, FSAs are a way for people to set aside money to pay for medical expenses. While your health insurance kicks in for things like hospital stays and procedures, it won’t help you when it comes to more everyday medical items.
For example, if you don’t have vision coverage, your insurance won’t cover any of the cost of an eye exam. And, in terms of medical coverage, your insurance may not pick up the cost of bandages or crutches. These are times when an FSA could come into play.
An FSA is like a savings account, but the money you put in it can be used to pay for common out-of-pocket medical costs. Because the out-of-pocket maximum is also increasing in 2018 — $6,650 and $13,300 for an individual and family, respectively — an FSA can be helpful in covering a portion of those costs.
What else you need to know about FSAs
You can only use an FSA on qualified medical expenses. If you choose to sign up for an FSA, there are specific guidelines on what exactly you can use the money on. These are commonly known as “qualified medical expenses.” Some things are somewhat obvious — like eyeglasses and bandages — while other costs — like medical transportation or purchasing extra equipment to make a TV ready for a hearing-disabled person — aren’t. See this list of FSA qualified medical expenses or check the IRS website for more details.
FSAs can lower your tax bill. Contributions to an FSA are pre-tax, which means whatever you put in (up to the maximum) is deductible. If you’re buying items you’re paying for anyway, FSAs are a great way to save some money come April.
FSAs are only available through your employer. FSAs are offered in conjunction with workplace health insurance plans. But if you’re buying your own health insurance plan, you still have options. A health savings account (HSA) serves the same function as an FSA — giving people a tax-advantaged way of paying for qualified medical expenses — but are only available with high deductible health plans (defined, for 2018, as a plan with a minimum individual deductible of $1,350). For more information, you can read this guide about health savings accounts.
You can roll over some FSA money. FSAs operate mostly on a use it or lose it basis, so any money that’s left over at the end of a plan year goes away. But in 2013, the IRS introduced an additional rollover option. In lieu of a 2.5 month grace period, during which accountholders can use any funds from the previous year, employers can instead allow employees to carry over up to $500. You can’t benefit from both — employers can only provide one rollover option — so it's a good idea to ask your employer what their plan entails.
You can sign up for an FSA when you get hired for a new job, during your company’s enrollment period or if you have a qualifying life event (such as getting married or having a child). If you’re deciding between going with your employer-sponsored health insurance or shopping on your own, the increased FSA contribution limit is something you need to keep in mind.