Did you recently elect to participate in a medical flexible spending account (FSA)? If you’re a first-time medical FSA participant, you may not be familiar with FSA definitions and rules. We’ve provided a list of the top things a first-time medical FSA participant should be aware of in order to take full advantage of their FSA.
What is a medical flexible spending account (FSA)?
A medical FSA is a tax-advantaged employee benefit that gives participants the opportunity to save on out-of-pocket medical, dental, and vision eligible expenses. They are employer-owned accounts. You can enroll in a medical FSA during open enrollment, when you’re hired at a new job, or when you experience a status change.
How a medical FSA works
After you’ve enrolled in a medical FSA through your employer, you then chose how much to contribute to your FSA. Your annual election amount comes out of your paycheck, and these pre-tax dollars are deposited directly into your FSA to be used on eligible expenses. The 2023 contribution limit for medical FSAs is $3,050 per year.
How to save with a medical FSA
Medical FSAs offer a great opportunity to save on general-purpose health expenses such as prescription drugs, insurance copayments and deductibles, and medical devices. Whether you have planned healthcare needs coming up this year, or you want to be prepared for unexpected expenses, using tax-free FSA funds will help you lower your healthcare costs.
And since your FSA contribution is taken out of your paycheck pre-tax, participating in a medical FSA decreases your taxable income, as well. Not only will you have money set aside for medical, dental, and vision expenses, you’ll also be able to take home more money as well! Check out our FSA calculator to see how much you can save with your medical FSA.
What are the eligible expenses?
You might be surprised by the variety of products and services you can spend your medical FSA dollars on. If you have a WEX benefits card, all you have to do is swipe your card to have eligible expenses approved. Just make sure you’re using your card somewhere that offers an Inventory Information Approval System (IIAS) or meets the IRS’ 90 percent rule.
Some of the most popular medical FSA eligible expenses are:
- Over-the-counter medication
- Prescription drugs
- Doctor copays
- Physical therapy
- Feminine hygiene products
- Vision correction procedures
- Dental procedures and services
How does reimbursement work?
If you choose to pay out-of-pocket for an eligible expense or if the claim is not automatically approved when you swipe your benefits card, WEX participants will need to submit a reimbursement claim through their online account or using a claim form. The IRS requires you to submit documentation of the FSA claim to prove it was an eligible expense. This documentation can typically be sent through an online account, mobile app, fax, or mail. Once the claim is approved, you’ll receive reimbursement through your benefits card, direct deposit, or check.
A step-by-step guide through claim reimbursement can be found here.
What is the use-or-lose rule?
What happens with any unused medical FSA funds you have at the end of the year? The IRS use-or-lose rule states that you must spend your FSA funds within the FSA’s plan year. That means, if you don’t spend most or all of your FSA funds by the end of the year (depending on your FSA’s individual plan rules), those unused funds are forfeited to the plan. So, if you’re on the more common January-to-December plan year, mark December on your calendar as the month to spend down your remaining FSA funds.
However, the IRS does allow employers the option to offer an FSA carryover option to their employees. An FSA carryover allows you to carry over medical FSA funds from one plan year to the next, meaning you won’t have to worry about spending all of their FSA funds before the end of the year. In fact, if your employer offered the maximum allowed $610 carryover from a 2023 plan, you could carry up to $610 from 2023 to 2024.
Do you want to learn even more about medical FSAs? Check out our podcast episode below!
The information in this blog post is for educational purposes only. It is not legal or tax advice. For legal or tax advice, you should consult your own legal counsel, tax and investment advisers.
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