HUMAN RESOURCES: WHAT HAS CHANGED WITH FSAS

The key to getting the most from an FSA is being fully informed about limits on contributions and spending

Medical expenses are one of the most unpredictable and costly budget stressors, and it is wise to take advantage of any opportunity to save for the unexpected. One such option is a Flexible Savings Account (FSA), which is an employee benefit used by millions to save for, and on, health care costs.

FSAs allow employees to withhold tax-free money from their paychecks to use for qualified medical expenses, effectively reducing taxable income while also saving for health care costs. For instance, if someone is in the 33 percent tax bracket, their FSA-qualified expenses would cost 33 percent less.

Eligible expenses typically include visits to the doctor or dentist, co-pays, procedures, prescription drug costs, eye exams, laser eye surgery, contacts or glasses, and chiropractor visits. With such a wide range of coverage, an FSA used effectively can result in significant savings.

What happens to unspent funds in FSAs?

However, it is important to understand the potential downside of FSAs: Those who fail to use all of their flex-account money may lose any unused contribution for the year. One way to mitigate that is to be well-informed about eligible expenses and strategic about taking advantage of those offerings.

Also, employers can add provisions to reduce the risk, such as a grace period that adds time to the new year to use the previous year’s contribution, or that lets employees roll as much as $500 over into the new year’s expenses. Ask your HR department or professional employer organization (PEO) if either of those options applies to the FSA that you’re interested in.

What’s new this year

Due to inflation, the amount an employee is allowed to contribute to an FSA rises slightly each year. As a result of this and changes in the Consumer Price Index in 2018, the contribution limit in 2019 has risen by $50, to $2,700.

This increase does not apply to dependent-care costs, which remain the same. Married couples should be aware of the following:

• Generally, the FSA limit for health care costs for dependents is $5,000 unless the employee files a separate return; in that case, there is a $2,500 contribution limit
• If only one spouse earns an income, no FSA contributions for dependent care are permitted
• If one spouse makes less than $5,000, the limit is reduced to the number of earnings
• If both spouses work and have access to separate FSA accounts for dependent-care expenses, they still have a total limit of $5,000 and will have to decide how to split that between the couple

Medical expenses are inevitable, so the ability to save taxes on those costs is a huge advantage that serves the dual purpose of allowing employees to plan and take responsibility for both their budget and their health care. Educate yourself on the pros and cons of flex accounts, stay informed about which expenses are eligible and on changing contribution limits to make your FSA as effective as possible.

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