Flexible Spending Plans

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Summary

Flexible spending plans let you set aside money from your paycheck. You can use it to pay for care before meeting your deductible, and for copays and coinsurance afterward. You may also be able to use the money for glasses, contact lenses, medical devices and other types of services. The contribution comes out of your salary before taxes. So, these plans can help you stretch your dollars to cover a larger share of your out-of-pocket medical costs. You often can decide how much to save, up to a certain limit. Your employer may put money in your account, too. Think carefully about how much to save. Some plans don’t let you carry money over from year to year, or from job to job.


Types of flexible spending plans include:



Flexible Spending Arrangement (FSA).

Workers contribute to this plan through deductions from their paycheck. Sometimes employers contribute to the plan, as well. This is a “use it or lose it” plan. You cannot carry money over to the next plan year.


Health Savings Account
(HSA).

Workers contribute to this plan through deductions from their paycheck. Sometimes employers contribute to the plan, as well. The account is yours. You can carry money from one year to the next, to a new job or even into your retirement. But, you pay large penalties for using the money for things other than medical costs.


Health Reimbursement Arrangement (HRA).

Employers alone contribute to this plan. You may be able to carry money over from year to year, depending on the plan. But, you cannot take it with you to a new job.


To manage costs using a flexible spending plan:



Use the FH Medical Cost Lookup or the FH Dental Cost Lookup to estimate how much you might pay for the services you need.


Talk to your providers. They may be willing to negotiate fees, take payments in installments, or order less costly drugs or treatments.


Review your family’s medical costs at the end of each year. Include deductibles, copays and coinsurance. Use that information to plan how much you may need to save in your flexible spending account.

What’s a flexible spending plan?

Some employers offer a special type of savings account to help you cover some of your out-of-pocket medical costs with pre-tax dollars. If you have one of these flexible spending plans (FSPs), you can set aside money from your paycheck to help pay for qualified medical expenses like copays, deductibles and coinsurance. You may also be able to use the money in your account for glasses, contact lenses and medical devices. Because the contribution comes out of your salary before taxes, FSPs can help you stretch your dollars to cover a larger share of your out-of-pocket medical costs. It’s important to note that these types of plans are set up and maintained by you and your employer—your health insurer is not involved.

What’s a qualified medical expense?

A qualified medical expense is generally anything that the IRS allows as a medical or dental expense deduction for people who itemize their deductions on their federal tax return. To find a list of qualified medical expenses, see the IRS publication Medical and Dental Expenses. This list changes regularly, so make sure to check it now and then if you are using a flexible spending plan.

Some examples of qualified medical expenses include copays and deductibles, medications, medical equipment such as crutches and bandages, hospital stays and more. In rare cases, insurance premiums may qualify, as well.

Keep in mind—in most cases, participants in FSPs cannot use their accounts to buy over-the-counter medications (except insulin), unless they have a written prescription from their provider. And, participants with FSP debit cards will need to show a written prescription from their provider to use their debit card at a retail pharmacy or through mail order.

Check your plan documents or ask your employer’s human resources department about these rules, so you can be sure you understand how your plan works.

Types of FSPs

There are three main types of FSPs—flexible spending arrangements (FSAs), also known as flexible spending accounts; health savings accounts (HSAs); and health reimbursement arrangements (HRAs).

Each of them has different features and rules.

Flexible Spending Arrangement (FSA)

How does it work?

With an FSA, employees decide how much of their pre-tax income to put into their account. Employers may make additional contributions to the account, too.

What if I don’t use all the money?

An FSA is a “use it or lose it” account. At the end of the year, employees can’t carry forward any unused money. So, if you have an FSA, it’s important to think carefully at the beginning of each year about how much you may need to spend on medical care over the next twelve months.

Some employers may offer you either a "grace period" of up to 2 and a half extra months into the next year to use your FSA funds or may allow you to carry over a maximum of $500 to use in the following year. If you are unsure about whether your employer offers either one of these options, ask your employer’s human resources department for more information.

Are there contribution limits for FSAs?

Yes. Individuals may contribute a maximum of $2,600 from their salaries to their FSA to use in 2017. Those with dependents, including a spouse and/or children, may contribute a maximum amount of $5,000 for 2017. The maximum contribution amount increases with inflation each year.

 

Health Savings Account (HSA)

How does it work?

HSAs also allow employees to set aside pre-tax dollars to pay for qualified medical expenses. But, these accounts are only available to people enrolled in High-Deductible Health Plans (HDHPs). HDHPs have lower premiums than traditional health plans, but the trade-off is that they have very coinsurances. So, people in HDHPs tend to have higher out-of-pocket costs. HSAs were set up to help cover those costs.

Employees decide how much to contribute to their HSAs. Employers may make additional contributions to the accounts, too. There is a limit on the amount of money that can be contributed each year. For 2017, individuals may contribute a maximum of $3,400. Those with dependents, including a spouse and/or children, may contribute a maximum amount of $6,750.

What if I don’t use all the money?

An HSA belongs to the employee. Participants in HSAs can carry the accounts over to a different employer if they change jobs, and can even carry them into retirement. But, it’s important to remember that there are very large tax penalties if the money is used for anything other than qualified medical expenses.

Is there a difference between a Health Savings Account (HSA) and a Flexible Spending Account/Arrangement (FSA)?

Yes. An HSA is a savings account owned and managed by an employee enrolled in an HDHP. Employees who have a medical FSA or are enrolled in a health plan that does not have a coinsurance may not enroll in an HSA.

 

Health Reimbursement Arrangement (HRA)

How does it work?

In an HRA, employers contribute all the money to an employee’s account. Employees can then use the funds to pay for qualified medical expenses covered by the employer’s group health insurance plan.

What if I don’t use all the money?

Participants in HRAs may or may not be able to carry unused money forward from year to year, depending on how the employer has set up the plan. But, if they change jobs, participants in HRAs cannot carry the accounts over to a different employer. If you are in an HRA, make sure to read your plan documents carefully or ask your employer’s human resources department about what happens to unused funds at the end of the year, or if you leave your job.

Your Action Plan: Know Where to Go


The IRS changes the rules regarding FSPs regularly, and health reform law may require additional changes, too. If you are enrolled in an FSP, it’s important to stay up to date on new developments, like changes in qualified medical expenses, limits and early withdrawals. 


  • Read your plan documents carefully. Flag any questions and speak to your employer’s human resources department to clarify them.
  • Take advantage of online tools, such as the ones on this website, to help you plan your medical and dental care expenses.
  • Keep current on the IRS publication that details qualified medical expenses.

Taking the time to stay current can help you get the most out of your flexible spending plan account, and avoid any unwelcome surprises.

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