What Is a Flexible Spending Account (FSA)?

A flexible spending account (FSA) is an account into which a worker can contribute pre-tax dollars to pay for qualified medical expenses. Qualified medical expenses include dentist and doctor visits, procedures, co-pays, prescription drug costs or co-pays, laser eye surgery, eye exams, contacts, eyeglasses, and chiropractor visits. A full list of medical expenses eligible to be covered by a flexible spending account is available in IRS publication 502.

Key Takeaways

  • A flexible spending account (FSA) allows individuals to put aside pre-tax dollars to pay for qualified medical expenses.
  • Up to $500 in unused funds can rollover into the following plan year.
  • As of 2019, the IRS has established an FSA contribution limit of $2,700 per qualified FSA.

What Is an FSA Rollover?

The U.S. Treasury Department has amended the original use-or-lose rule for FSAs to allow some funds to rollover at the end of the plan year. Up to $500 in unused funds can rollover into the following plan year. Companies can offer a grace period of up to 2.5 months for employees to use the money or carry over $500 to the next year. An employer can elect to allow less than $500 to be rolled over, but the same rollover limit must apply to all plan participants.

For example, if you elected to contribute $2,600 for a year, but only spent $2,300, you could carry over the remaining $300 to use next year. Keep in mind, if you only spent $2,000, you could still carry over $500, but you would lose the remaining $100.

Contribution Limits Versus How Much You Should Contribute

As of 2019, the IRS has established an FSA contribution limit of $2,700 per qualified FSA. This maximum contribution is to be annually indexed to inflation. However, there are some ways to get around the maximum limit.

If you hold two or more jobs (with unrelated employers), you can elect up to $2,700 (2019) under each employer’s FSA plan (or up to each employer’s maximum allowed). If married, each of two spouses can contribute to their employer’s plan (effectively doubling the total contribution).

Note that a sum rolled over from a previous year does not count against the contribution limit of the next year. In addition, sums that are carried over can continue to be carried over in subsequent years.

It may be difficult to predict how much money you should contribute to an FSA account from year to year, but it's important to consider the most common uncovered and qualified medical expenses you might have during a year. These services could include:

  • dental co-pays
  • prescription drug co-pays
  • prescription eyeglasses and/or contact lenses
  • eye exams or eye exam co-pays
  • orthodontics

To determine your FSA contribution for a year, estimate these expenses as a baseline. Also, add in any other predicted expenses for your family. Be sure to consider any special medical needs that you are 100% sure you will have.

Grace Period

The FSA grace period is a period at the end of the year during which you can use any unspent money in your FSA. The grace period can be up to a maximum of two and a half months but may be shorter depending on plan setup.

For instance, if your plan runs from January 1, 2019, through December 31, 2019, you would have until March 15, 2020, to use all of your FSA funds. Any unused FSA balance for the 2019 plan year would be lost after the grace period ends.

Run-Out Period

Run-out is a predetermined period during which you can file claims for the previous year. For instance, if your run-out period lasts until March 31, you would have until that time to file claims for expenses that happened before December 31. Run-out periods can vary by plan.

As an example of how a run-out period works, if you visited the dentist on November 1, but you had yet to file a claim, you could still file before March 31. Any unused funds after March 31 would be forfeited.

Get in touch with a benefits administrator or HR department to get all the grace period and run-out period details for your FSA plan.

As of 2019, the IRS has established an FSA contribution limit of $2,700 per qualified FSA.

FSAs Versus Health Savings Accounts (HSAs)

To many people, the differences between FSAs and HSAs can be confusing. However, there several key differences that are important to note:

  • You own an HSA; your employer owns the FSA. That means your HSA stays with you when you leave an employer, but you cannot do the same with an FSA.
  • You can invest funds in an HSA; you cannot with an FSA.
  • Contributions maximums between the two differ.