Mar 09, 2023

How a Flexible Spending Account (FSA) Works

happy healthy family using an fsa flexible spending account

    How a Flexible Spending Account (FSA) Works 

    An FSA is a benefit that allows pre-taxed funds to be used for planned medical expenses. Below, we’re going to discuss what an FSA is, ways it can be used, and how members can plan and contribute funds to it. 


    An FSA, or Flexible Spending Account, is a benefit that allows you to lower your taxable income by setting aside funds from your paychecks to use on medical expenses tax-free. Please note that not everyone has or is offered an FSA, but if you have this benefit, read on to learn more about what it is, how it works, and how you can benefit from it.

    With an FSA, the total amount of funds you have planned to allocate from each paycheck during the year is available for you to use right away. This gives you great flexibility whether you plan to use your funds incrementally or to cover big medical expenses right away. 

    You have a lot of options on what you can use your FSA funds on. One popular example is prescription drugs. 


    FSA for Prescription Drugs

    Let’s say you take a Tier One prescription that’s covered by your insurance but incurs a $20 copay each month you pick it up. You could plan to allocate that $240 you’ll be paying over the course of the year to your FSA. Those funds will be divided evenly and set aside from your paychecks each period to be used, tax-free, towards your prescription.  

    Even if you take a more expensive Tier Three or Four drug, such as injections, that costs hundreds of dollars in copays to pick up, you can still use your FSA and cover those costs tax-free. 

    Another way you can use your FSA funds is for meeting your deductible.  


    FSA for Meeting Deductible

    With medical events like surgeries, you typically must meet the deductible first before coinsurance kicks in. For members that have a surgery or pregnancy planned, they can use the FSA to cover that deductible.  

    With the Medical FSA, you have access to your full yearly elections at the start of the year, enabling you to pay the deductible upfront and spread the cost out over the course of the year, reducing stress. 

    For example, let’s say you have a surgery on a medical plan with a $2,000 deductible. Based on this plan, you would need to have that deductible met first before the coinsurance kicked in, making that a big upfront cost. 

    You would then just have your regular FSA deductions every paycheck for the rest of the year. In this case, if you were doing just enough to cover the deductible it lowers your taxable income by $2,000 dollars and if you are paid every other week, you would have $77 dollars coming out of each paycheck.

    Using FSA funds for prescriptions or to reach your deductible is a great way to save money and reduce stress on planned medical payments you’d already be making anyway.


    FSA Calculator

    For best effectiveness, it’s recommended you calculate your planned medical expenses to allocate the right amount of funding. 

    Follow the link below to use this easy, online calculator to estimate your planned annual spending and see how an FSA can suit your needs:


    What About Dependent Care?

    FSA funds can also be used for dependent care expenses, such as childcare. But this works a little bit differently with some limitations. 

    Dependent care is different from other FSA options because you only have access to the funds you have already contributed, but it is still a good way to access pretax money, especially if you have a lot of daycare expenses. Additionally, there are limits to what you can add and use each year you should be aware of. 

    For example, let’s say you have two children in daycare. For a 1-year-old, you pay $420 a week, and for a 5-year-old child, pay $180 a week. This means that your total daycare expenses for the year is $31,200. 

    The annual maximum you can contribute per household is $5,000. If you get paid every two weeks, you will have $193 deducted per paycheck. This money is tax-free and can be used for dependent care, lowering your yearly income by $5,000 and helping cover those costs. 

    Again, it’s recommended to calculate your planned annual spending to allocate the right amounts of funds from each paycheck to your FSA. 


    Here For You

    For help with any of this and more, the Advocacy Team at Morris & Garritano is here for you. Don’t hesitate to call our office for a direct connection to one of our friendly and helpful representatives.

    What "covered" should feel like.

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