Do you have a flexible spending account? Did you know that if you don’t use the funds in it by the end of the year, you will likely lose the money that’s in it? Don’t let a dime of your FSA account go to waste. I’ve taken the liberty below of spending some time to explain more about the flexible spending account arrangement and how to maximize its benefits.

A flexible spending account / arrangement (FSA), or Flexible Spending Account, as they are often called, is one of a number of tax-advantaged accounts that can be set up through an employer or through an employer’s cafeteria plan. An FSA allows an employee to set aside a portion of their earnings to pay for qualified expenses. The qualified expenses are most often established in the cafeteria plan, most commonly for medical expenses but also for dependent care or other expenses. Money deducted from an employee’s pay into an FSA is currently exempt from ordinary payroll taxes, resulting in a payroll tax savings for the employee.

The most popular flexible spending account is the medical expense FSA (also medical FSA or health FSA). An FSA may be accessed by traditional paper claims or the more popular FSA debit card which is also known as a Flexcard.

Most employer cafeteria plans offer two different flexible spending account options; one that is for medical expenses and the other that is for dependent care expenses. Currently funds cannot be transferred from one FSA to another.

Medical expense FSA

The most common type of FSA is the medical expense FSA. This flex spending account is used to pay for medical expenses which are not paid for by insurance. This can include co-payments, deductibles and coinsurance for the employee’s health plan. It may also include expenses not covered by the health plan, such as dental and vision expenses and in some cases over the counter drugs. A medical FSA can’t be used to pay for health insurance premiums, cosmetic surgery or items that improve “general health”. All items purchased with medical expense FSA funds must be intended to treat or prevent a specific medical condition.

The annual caps for a medical FSA varies by employer. Employers generally limit the annual amount each employee can contribute. Should the employee leave or be terminated and therefore no longer pay in to the plan, the employer does not recover any amount they may have pre-funded into the FSA from the employee’s payroll deduction.

Flexible Spending Accounts debit cards allow for an automatic transfer of pre-tax dollars from an employee account when paying for qualified medical expenses. Ask your employer if they have a debit card option as it is much easier to use than the traditional paper claims process.

An FSA’s coverage period ends either at the time the “plan year” ends for your plan or at the time when your coverage under that plan ends. Example: Loss of coverage due to a separation from the employer.

Use it or lose it

One of the major drawbacks identified in the traditional FSA’s is that the money must be spent within your coverage period as defined by the benefits cafeteria plan coverage definition. Any money that is left unspent, at the end of the coverage period, is forfeited back to the administer. This is also known as the “use it or lose it” provision. An unfortunate possibility, especially in the case of an immediate layoff, is that should you have unused contributions in your FSA and no additional qualifying claims during your coverage period you will lose these funds. The other side of this coin is that if the payroll taxes you saved on your employee contributions exceed the amount you forfeited then you will have saved money. Also, the annual contribution amount must remain the same throughout the year unless certain qualifying events occur, such as the birth of a child or death of a spouse.