Flexible spending accounts, or FSAs, are special savings accounts offered through some employer benefit plans. They allow the account holder to pay for certain out-of-pocket medical and dependent care costs with tax-free money.
However, âtax-free moneyâ is a phrase thatâs not used too often in personal finance articlesâat least not legitimate ones.
So itâs no surprise that FSAs come with a decent number of rules and regulations, which limit the application of this special, tax-favored savings vehicle.
For instance, FSA rules cap the amount of money that can be placed in the account each year ($2,750 for 2021), and also dictate which types of expenses qualify for an FSA distribution.
Still, FSAs can be a powerful tool for taking care of unavoidable medical costs that frequently wreak havoc on American finances, even with the rules that keep them in check.
Flexible Spending Account Explained
Weâve covered flexible spending accounts in depth elsewhere on our site, but as a quick refresher, FSAs are savings programs offered through employersâwhich means that self-employed people, like freelancers, arenât eligible.
(Psst: if thatâs you, buying a healthcare plan on the market might be an option to consider, though you may also be able to get coverage through an employed spouseâs plan.)
FSAs are also sometimes called flexible spending arrangements, and there are a few sub-types, such as dependent care FSAs (DCFSAs) and limited purpose FSAs (LPFSAs).
However, for the purposes of this article, the focus will be on the account rules that govern plain old healthcare FSAs, whose funds can be used to cover you, your spouse, and your dependents.
Flexible Spending Account Rules: An Overview
IRS Publication 502 .
From acupuncture and alcoholism to birth control pills and psychological counselling, many services do count as qualified medical expenses.
Along with being the right kind of medical expense, services paid through FSA funds must be applied to the right people in order to be covered. Eligible beneficiaries include:
• The account holder
• Their spouse
• Dependents claimed on their tax return
• Children age 26 and under
Keep in mind, too, that FSAs generally work in conjunction with other types of health benefits and coverage, and funds canât be used to reimburse services that are covered under other health plans.
It might be a valuable exercise to write out all of the expected medical expenses youâll face as a family at the beginning of the plan year in order to decide how much to contribute, including additional coverages, in order to avoid overcontribution. While nobody can predict the future, some routine expenses can be foreseenâand a little bit of planning might save a lot of forfeited funds in the end.
Taking Distributions from an FSA
The process for taking distributions from an FSA may vary based on the plan. In some cases, distributions are made from an FSA to reimburse the account holder for medical expenses theyâve incurred. Some FSAs also have a debit, credit, or stored value card that can be used to pay directly for qualifying expenses.
Fair Health Consumer , would set back an uninsured person living in Portland, OR more than $20,000. Although that cost varies depending on location, itâs clear to see that additional coverage is necessary for most.
Furthermore, although the tax-free nature of FSAs is attractive, the prospect of forfeiting parts of a paycheck is definitely notâand there are other ways to save cash for medical expenses and other emergencies which offer not just flexibility, but growth.
For example, the average savings account earns 0.50% APY in interest, and up to 0.80%, per the latest FDIC rate cap information, which isnât a huge return, but is more than the 0% youâll earn on an FSA. That said, the value of tax-free dollars could easily eclipse the interest rate if the funds in the FSA are actually used.
While an FSA can be a beneficial tool, especially for those who know theyâll spend a decent amount out of pocket on healthcare, a SoFi MoneyÂ® cash management account can add additional help in this instance; there are no account fees and account holders can earn cashback while they save and spend.
The Vaults system allows you to set money aside for specific savings goalsâincluding medical expenses as well as more exciting objectives like vacations or home renovations. The tax benefits of the FSA can make them an appealing and useful tool. But if youâre not sure youâll use the funds saved in an FSA, SoFi Money could be an alternate solution. Those that will definitely use funds saved in an FSA may consider using SoFi Money as a complementary tool to work toward other saving goals.
Want to learn more about how SoFi Money might help you get your money right? Signing up takes minutes.
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