Most people who get their health insurance through their employers also have access to a flexible spending account (FSA) that allows them to reserve up to $2,650 tax-free (the 2018 rate) for health expenses not covered by insurance. "Think copays and co-insurance for prescriptions or other out-of-pocket medical services," says Jody Dietel, the chief compliance officer for WageWorks, a benefits administration company in San Mateo, CA.
The funds can also be used for any tax dependents, whether or not they are covered under an employee's health insurance plan. If a dependent received physical therapy for cerebral palsy, for example, the employee can use his or her FSA to pay for copays or an out-of-network physical therapist.
Money to fund the FSA is taken out of your paycheck every pay period, but the full amount allocated is available on the very first day of the plan year, says Dietel. That means that if your benefits year begins on January 1, you could spend the full amount that day, even though it hasn't been deducted from your salary. And if you spend the full amount and leave the company before it's been fully deducted, you don't have to pay it back.
Also, your taxable income is calculated after you contribute to your FSA. For example, if you earn $50,000 but set aside $2,500 for your FSA, your taxable income is $47,500. And you pay no taxes on the FSA money you use for eligible expenses.
How to Spend It
Many people forget they have an FSA or don't know how to spend the money, says Paul Fronstin, director of the Health Research and Education Program at the Employee Benefit Research Institute (EBRI) in Washington, DC. He advises checking your company's list of approved expenses before spending FSA funds. Common eligible expenditures include acupuncture treatments for migraine, blood pressure monitors to prevent stroke, mileage or ride shares for trips to the doctor, orthodontia, and walking aids, such as canes, walkers, and crutches.
Other expenditures that may be approved by your employer include copays, co-insurance payments, and deductibles for dental, medical, vision, and prescription coverage; flu shots or other vaccinations; physical therapy; lab fees; medical records charges; prescription drugs; and mental health counseling; if these are not covered by your health insurance.
If you want to be reimbursed through your FSA for non-prescription drugs, you are required to ask your doctor for a prescription for most of them. Bring your employee handbook to your doctor for confirmation, suggests Seth Keller, MD, a neurologist in Voorhees, NJ.
How to Claim It
After you spend the money, you'll submit a receipt and claim form for reimbursement. If the documentation is incorrect, the claim will be returned. Recently, companies have created simpler reimbursement options, including a smartphone app that lets you snap a photo of the receipt and send it to the claims firm and credit cards for FSA expenses only. In general, you lose funds in the FSA not used by the end of the year. However, some plans include either a grace period of two and a half months or a carryover. Some FSAs allow funds of up to $500 to be used to pay for qualified medical expenses incurred the following year.
HSA: Another Account to Consider
People who have a high-deductible health insurance plan may qualify for a health savings account (HSA), says Jody Dietel, the chief compliance officer for WageWorks, a benefits administration company in San Mateo, CA. For 2018, HSAs were available to those whose health insurance plan had an annual deductible of more than $1,350 for individual coverage and $2,700 for family coverage.
If your health insurer doesn't offer an HSA, you may be eligible to open one at a bank or other financial institution, says Dietel. You decide how much to put into the account, up to the limit allowed by law; for 2018, the limit is $3,450 for an individual and $6,900 for a family. Adults over 55 can add $1,000 more. Qualified expenses include deductible costs and copays, but not health insurance premiums.
Unlike a flexible spending account, money in an HSA is never forfeited, even if you change jobs, switch health care plans, or retire, says Dietel. And you can invest your HSA dollars through investment firms that offer the service. As with an FSA, your taxable income is calculated after you contribute to your HSA.