What is an FSA?
A Flexible Spending Account (FSA) is an employer-sponsored savings account that allows employees to set aside pre-tax money for qualified expenses. Employers may also contribute to the account. FSAs can be used primarily for healthcare and childcare expenses, making them a valuable tool for managing out-of-pocket costs.
According to the U.S. Bureau of Labor Statistics, the average American household spent around $5,177 on healthcare in 2020. Similarly, the annual Care.com Cost of Care Survey found that 85% of parents in 2021 spent 10% or more of their household income on childcare.
An FSA helps ease the financial burden by allowing you to allocate pre-tax earnings toward these necessary expenses.
When Do I Need to Spend My FSA Funds?
Unlike other employee benefits, FSA funds do not typically roll over from year to year. If you don’t spend them, you lose them. However, some employers offer one of the following options:
- Grace Period: An additional 2.5 months to use FSA funds (deadline: March 15th).
- Carryover: A rollover of up to $550 (for 2021) into the next year.
Employers can offer one of these options—but not both—and are not required to offer either.
For 2021, the contribution limit for a Health Care FSA (HCFSA) remains at $2,750. The American Rescue Plan temporarily increased Dependent Care FSA (DCFSA) limits to $10,500 for joint filers and $5,250 for single filers.
What Can I Spend My FSA On?
It depends on the type of FSA you have:
- Health Care FSA (HCFSA): Covers out-of-pocket medical, dental, and vision expenses such as copayments, deductibles, prescriptions, and physical therapy.
- Dependent Care FSA (DCFSA): Used for childcare expenses for children under 13, including preschool, daycare, and after-school programs. It may also cover dependent adults who meet IRS guidelines.
How to Spend Your FSA Funds Before They Expire
Don't let your funds go to waste! Here are some smart ways to use any remaining balance:
- Sight for Sore Eyes: Purchase prescription glasses, contacts, or sunglasses. Use your AAA membership discount at LensCrafters.
- Save Your Skin: Use FSA funds for sunscreen, moisturizers with SPF, and skin protection. This is especially useful if you travel frequently.
Other eligible expenses include family planning products, over-the-counter medications, baby products, sleep aids, and alternative medicine treatments. Check the DCFSA and HCFSA eligibility lists for a full range of covered items.