Is an FSA Right for You? Here's How They Work

FSAs—flexible spending accounts—can help you save money, but there’s a catch.

One of the great mysteries of healthcare in the U.S.? Even with health insurance, you still have to pay sometimes-astounding fees after a visit or procedure. These out-of-pocket expenses contribute to your deductible, and in most cases, you'd pay more without insurance. But those finer points of health insurance can feel irrelevant when you're facing a large bill after an appointment with your in-network doctor.

Fortunately, there are dedicated savings accounts in place to help make out-of-pocket healthcare expenses more affordable. You may already be familiar with an HSA, or health savings account, which allows participants to save money for healthcare costs tax-free, but you should also be familiar with flexible spending accounts, or FSAs.

But is an FSA worth it? Used intentionally, FSAs can help you save money. If you can use one, here's what you need to know to make the most of your flexible spending account.

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What Is an FSA?

An FSA, or flexible spending account, allows you to set aside money on a pre-tax basis to be used for qualified medical expenses, says Katie Waters, CFP, founder of Stable Waters Financial, a Georgia-based financial planning firm. Qualified medical expenses can vary based on your plan, provider, and employer, but generally, you can use funds from an FSA for anything defined as a medical expense by the IRS. (As of 2020, you can even use those funds for menstrual products.)

Use your FSA to pay co-pays and exam fees or buy medical equipment. Sunscreen with a high SPF can even be purchased with FSA funds. Helpfully, large retailers such as Amazon and Target and many pharmacies will separate your purchases into healthcare expenses and non-healthcare expenses, so you can use your funds at those locations for eligible items, too.

FSAs are typically provided with lower-deductible health insurance plans, though employers can choose whether they want to offer FSAs. You can also choose not to contribute to your FSA. If you do opt into an FSA, you can contribute a certain amount of money to the account with every paycheck. This money will be automatically deducted from your pay and placed in the account. Some employers will even make contributions to employees' FSAs as part of the overall healthcare package to encourage people to contribute to and use these accounts.

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Are There Any FSA Limits?

For 2023, FSA contributions are limited to $3,050 for the calendar year. FSA participants cannot contribute more than that to the account for extra tax savings.

Also, it's worth noting that participants commit to their regular contribution amounts at the beginning of the year: Unless you have a qualified status change, such as a loss of employment, marriage, or the birth of a child, you cannot change your contribution amounts until the next year.

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Can an FSA Save You Money?

The most important thing to remember with FSAs is that those funds are use-it-or-lose-it: You must spend all money placed in an FSA by the end of the calendar year. If you don't, that money disappears. Some employers can choose to allow a grace period of up to two-and-a-half months in the following year for employees to use FSA funds, or they can allow employees to carry over up to $610 of FSA funds into the next year—but not both.

This policy means many people scramble to use their FSA funds at the end of every year by booking non-essential appointments, purchasing new glasses, getting massages, or incurring other expenses they can pay for with remaining FSA dollars. It also means using an FSA to support your emergency fund isn't a great idea: If you're lucky and no medical emergency occurs in the calendar year, those savings disappear.

An FSA won't lower the actual costs of your healthcare expenses. Its real money-saving benefit comes from tax savings: Your contributions to an FSA are pre-tax, meaning they lower your taxable income, saving you money on taxes in the long-run. Contributing to an FSA will lower your take-home pay, but it will also lower the amount withheld for taxes—and you'll have money ready to be used for healthcare expenses when you need it.

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Is an FSA the Best Option for You?

Should you opt into an FSA? First, remember that FSAs are employer-offered based on your health insurance plan: If your employer doesn't offer an FSA, you don't have much of a choice.

If your employer does offer an FSA, you don't have to automatically opt-in if it's not the right choice for you. "I really encourage people to take a good look at how much they've spent on medical expenses previously," Waters says. If you've spent very little on healthcare (outside of premiums) in the last few years, the money you contribute to an FSA might not be used.

"People need that cash flow and want to put it in other places," Waters says. If you expect low healthcare expenses, you can instead put that money toward savings, paying down debt, travel, and other goals.

On the other hand, if your out-of-pocket healthcare expenses are high every year, contributing the full amount to an FSA will help you save money where you can.

Also, FSAs are use-it-or-lose-it: If you're going to choose to fund an FSA, you have to commit to spending all that money within the year, or you'll have wasted those funds. Keep that in mind as you're choosing whether to opt into an FSA and deciding how much to contribute.

Finally, do a little research into how you access your FSA funds. Some employers offer reimbursement-only options, while others offer a debit card or checkbook that allows you to pay with FSA funds on-site. If the reimbursement process is difficult—you have to bring a paper receipt to your HSA department, for example—you may not realistically file for reimbursement, so contributing to your account is just wasting money.

"We see a lot of [people] opting not to do the FSA because the savings [are] pretty negligible depending on what the filing process is like," Waters says. If accessing funds is easy, though, that's another reason to take advantage of an FSA.

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