This article was last updated on January 15
[Updated with 2017 limits] Flexible Spending Accounts (FSA) have been around for a while now and many families use them as a tax advantaged way to save for health care and dependent care related costs. However every year various limits associated with FSA accounts are reviewed by the IRS and adjusted as needed. The table below summarizes the key changes over the last few years. If you use FSA or similar pre-tax accounts these are changes you should be aware of, particularly during open enrollment when you make your FSA allocations for the year ahead.
Many employers offer Flexible Spending Accounts (FSA) to their employees. There are generally two varieties of FSA accounts – one for qualified health/medical related costs and one for dependent care expenses. Employees can choose to have either or both. The annual contributions to a FSA account are limited to the lesser of the mandated IRS limits or the employee’s or spouses total “earned income” for the year.
A health care FSA is an account where a certain amount of money is deducted from an employee’s paycheck (pre-tax) and placed in to an account that is used to pay for authorized medical expenses. These expenses include doctor’s visits, prescription medications and eyeglasses. However funds in a Flexible Spending Account cannot be used to pay for over the counter (OTC) products, unless they are prescribed by a doctor. Some drugs, including insulin, will be exempt from this rule. For doctor’s to prescribe a OTC drug, they will need to show cause that the drug is a necessity for the patient. If you and your spouse each have a Health Care FSA, you may each contribute up to the annual maximum (per table below), however you may not submit the same claims to both accounts, and you may not transfer funds between accounts. FSA contributions (employee salary reductions) are limited under the Affordable Care Act (ACA) and may only be adjusted annually for inflation in increments of $50.
A dependent care FSA is also pre-tax benefit account that can be used to pay for dependent care services, such as day care, preschool, summer camps, and non-employer sponsored before or after school programs. It can also be used for elder daycare – when an elderly or disabled parent is considered a dependent and you are covering more than 50% of their maintenance costs. The Dependent Care FSA limit shown in the table below is based on filing status. Generally joint filers have double the limit of single or separate filers. The dependent care FSA maximum is set by statute and is not subject to inflation-related adjustments.
Note that the dependent care FSA maximums are the total household contribution based on filing status. So no matter how many kids you have, your maximum qualified contribution is limited to the maximum annual amount. Furthermore, even if each spouse has access to a separate FSA through his or her employer, they cannot “double-dip” and are still subject to the mandated maximum limits.
The latest mandated FSA contribution limits on how much employees can contribute to these accounts as shown in the table below. Employers though can also set their employees maximum contribution based on filing status and income, which may be below the IRS contribution limits.
|Coverage Year||Max Health Care FSA Contribution (per person/employee)||Dependent Care FSA Max Election (married, family max)||Dependent Care FSA Max Election (filing separate)|
Biggest benefit of a FSA – Because FSAs are funded on a pre-tax basis from employee pay checks, no tax is paid on the contributions. This means that the employee is essentially getting a discount ( on medical expenses equal to their effective tax rate (30%+ for those with higher tax rates/incomes), often representing hundreds of dollars in savings over the course of the year that these funds can be used. Also in today’s modern world, most companies sign up with a FSA provider that provides a debit card or online claim portal making it very easy to get reimbursements for qualified expenses.
However one big watch-out with these accounts is that any unused FSA funds at the end of the plan year are forfeited by the employee, known as the use-it or lose-it feature. Some employers do allow a $500 carry-over, but that is not mandated. Either way this is why you must spend time planning your FSA contribution for the year ahead and only put away what you can reasonably expect to spend. Look at your past expenses as a guide and adjust for any changes to your family size and/or known health issues to determine how much to put into each type of FSA account. If you do want more control on your health care accounts and want funds roll-over year to year consider a High Deductible Health Plan with HSA account.