It’s open enrollment time for medical insurance, which means people are comparing plan prices and coverage to determine what will work best for them as an individual, or for their family. One potential option is a high deductible PPO (Preferred Provider Organization) combined with an FSA (Flexible Savings Arrangement).
There are several important characteristics about an FSA that people should know before they decide on their medical insurance coverage for the next year:
Tax Free Contributions
FSA contributions through payroll deductions are tax free. Therefore, qualified medical expenses paid for using FSA funds use tax free dollars. Examples of qualified medical expenses include office visit co-pays, prescription drugs, and even dental and vision care. Using tax free dollars to pay for medical expenses can help to reduce the overall cost of medical care.
Maximum Contributions
A person can contribute up to $2550 to an FSA during 2016. An employer can also contribute towards an employee’s FSA, however the total contribution by the employer and the employee cannot exceed the $2550 maximum amount.
Funds Available For Immediate Use
A unique feature of an FSA is that the full year’s contributions are available for use on the first day of the plan period. For example, if a person enrolled in an FSA stating they will contribute $2000 for the 2016 plan year, the full $2000 is available to be used to pay for qualified medical expenses on the first day of the plan year.
Enrollment Requirement
People that have an FSA as an option within their employer’s offered medical care choices must enroll in an FSA for 2016 even if they contributed to an FSA in the previous year.
Carry Over Options
Generally the funds in an FSA must be used by the end of the calendar year or they are forfeited. There are, however, two carry over choices that may be offered by employers:
- The carry over option allows FSA participants to carry over up to $500 of unused FSA funds at the end of 2016 into 2017.
- The grace period option extends the time frame in which FSA users can use their funds by 2.5 months before they are forfeited.
Employers are not required to offer FSAs, nor are they required to offer any or either of the carry over options.
Flexible Savings Arrangements offer several benefits that may fit with your medical coverage needs. Check with your employer for specific information regarding how your specific FSA option works. More information about FSAs can also be found on the IRS website.
Have you participated in an FSA? How did it work for you?
An employer can contribute up to $500 to their employee’s Medical FSAs on top of the $2,550 limit (for a total available balance of $3,050).
If you had $500 that rolled over from the previous year you could have up to $3,550 to spend in the next plan year.
An important point for people to remember is that expenses must be incurred within the plan year to be eligible for reimbursement (so a past expense cannot be paid with future year funds).
I was not a huge fan of FSAs because you have to know what your medical expenses would be for the year. The only thing I was sure I could estimate was the cost of my contact lenses and trip to the eye doctor.
I have not, largely because I’ve never had the option available through work. I know the dependent care FSAs usually work out to be a pretty sweet deal, though, and the projected costs are a little easier to predict.
An FSA would have been great when I had Lasik years ago! Haven’t used one though because I rarely have much medical expenses, but it’d be great for someone who knew they’d have some upcoming expenses.
@JimHayes – thanks for the correction….I must have interpreted my information incorrectly!
@Mel – that’s true….because it’s a “use it or lose it” deal. At least now “some”of it can be carried over.
@FemmeFrugality – I’m surprised that your employer doesn’t offer an FSA as an option, but then again, I work for a very large corporation so I’m guessing they are more likely to offer the full spectrum of health care choices.
@heather – We generally don’t have much in the way of medical expenses either…but you can use the funds for dental and eye care expenses too!