Who Can Use Your Flexible Spending Account (FSA)?

A flexible spending account (FSA) is a special tax-advantaged savings account permitted by the Internal Revenue Service (IRS) and established by employers. FSAs allow taxpayers to save a portion of their pre-tax earnings and set aside for qualified medical and dental expenses. The account can be used by the account holder and their spouse. The IRS also allows FSA funds to be used by any person claimed as a dependent on the FSA owner's tax return, with certain qualifications.

How Flexible Spending Accounts (FSAs) Work

A flexible spending account (FSA) is a tax-free account that is available to salaried employees. This type of account is sponsored and maintained by eligible employers. FSA contributions have an annual limit, which is adjusted for changes in the cost of living by the IRS every year. The contribution cap for FSAs in 2023 is $3,050.

Contributions are exempt from federal income tax, federal unemployment tax, Social Security, and Medicare taxes. To qualify for tax-free status, distributions from an FSA must not exceed contributions in a particular calendar year, and the funds must be spent on qualified medical expenses.

Keep in mind that you must use all of the funds in your account by the end of the plan year. This means if you don't use up all your benefits, you lose whatever remains at the end of the year. Some plans, though, may extend benefits in one of two ways:

1. By providing account holders with a grace period of up to 2½ months after the new year begins,
2. Allowing participants to carry over a certain amount to use in the next year. This amount is capped at $610 for 2023.

These are costs incurred to treat or alleviate a medical condition. Most cosmetic procedures, such as teeth whitening, a facelift, or liposuction, are not allowed. However, some illnesses or accidents lead to physical injuries that can be treated with surgeries and procedures typically considered cosmetic in nature. In these scenarios, FSA funds can be used to pay for these specific cosmetic surgeries as they are performed to treat a medical condition. More on qualified and unqualified expenses below.

Who Can Use FSA Funds?

The primary FSA owner can use the funds. But did you know that other individuals can use the account as well to cover their qualified expenses?

If you are married, your spouse may also incur qualified medical expenses that can be covered by your FSA funds. Furthermore:

• A spouse may also use funds to pay for dependent child care expenses in a dependent care FSA
• Distributions from FSAs can also be used by dependents who are claimed on the owner's tax return

Keep in mind that a dependent who earns gross income in excess of $4,400 and files a joint return or can be claimed as a dependent on someone else's return are not eligible.

What's Covered and Not Covered

The table below outlines some of the expenses that are considered qualified and unqualified under flexible spending accounts. Keep in mind that this isn't an exhaustive list. Check with the IRS or your plan administrator to verify what you can pay for before you incur any expenses.

The Bottom Line

Paying for health care can be financially draining even if you have health insurance. That's why some employers offer flexible spending accounts, which allow you to save a portion of your pre-tax earnings to set aside for certain medical and dental costs during the year. Contributions are capped and adjusted every year for inflation.

If you have an FSA, make sure you find out what you can and cannot claim. And if you aren't allowed to carry over any part of your balance, be sure to use up the funds before the end of the year, otherwise, you forfeit the unused amount.