5 mistakes to avoid with flexible spending accounts
A flexible spending account (FSA) can be categorized as a savings account. It helps the owner get certain tax benefits. Sometimes also referred to as flexible spending arrangements, FSAs are helpful for health and dental care reimbursements, childcare, or care expenses for a dependent adult. But to get the best out of these, it is essential to learn about potential pitfalls. Here are some of the common mistakes to avoid with FSA.
Assuming one can take the FSA with them after quitting a job
FSAs work this way: An employee contributes a part of their salary to the fund, and the employer contributes the rest. Therefore, the FSA money stays with the employer once an employee quits a job. Hence, it is usually recommended to use up any pending healthcare expenses when one is planning to leave an employer. For instance, one can fill a prescription or buy eligible OTC products that they may need in the future by using the remaining FSA funds before they quit the job.
Not getting to know what the FSA will pay or not pay for
Most people are not aware which services and products come under eligible expenses for an FSA. For example, some may assume that gym memberships or insurance premiums can be paid for with a flexible spending account. However, this may not be true, and one may incur a penalty. So, it helps to understand which services are eligible. This can be done by carefully reading through the plan documents carefully. By reading the documents, one may know that even though their FSA does not cover their insurance premium, they may be used for payments of a copay or deductible.
Missing out on using FSA for eligible over-the-counter products
While FSAs are primarily used to pay for healthcare expenses and prescriptions, they are also useful for managing expenses of over-the-counter (OTC) products as well. Some of the lesser-known eligible products include breast pumps, foot circulators, feminine hygiene products, and DNA test kits. The complete list of eligible products can be found on the FSA Store website. Not many people are aware of the several OTC products that can be paid for using FSAs. Thus, they end up missing out on an excellent money-saving opportunity with their FSA accounts.
Forgetting to plan FSA needs
Generally, funds in FSAs do not carry over to the next year. Therefore, not planning one’s FSA needs can lead to losing valuable funds, especially as the year ends. This is because a flexible spending account is like a use-it-or-lose-it deal. Therefore, it is important to decide one’s needs by evaluating and examining all the expenses that can be met through FSA. For example, if one is using health FSA, it helps to look into annual healthcare spending. This will help in calculating the approximate contribution that needs to be made to the FSA. One can thus prevent being underfunded or having funds that are of no use at the year’s end.
Not storing bills and records
During the time of FSA withdrawal, one needs to prove that their healthcare expense is eligible. Also, the IRS may inquire how one is using their funds. At such times, bills, receipts, and copies of invoices can be useful proofs. These proofs must be safely stored for at least three years. Meticulously documenting all the FSA-related expenses can also help in case a provider or employer states that certain healthcare costs are not eligible.
