A flexible spending account is a great tool to use in conjunction with your health insurance. They are sometimes provided by employers and can be used to save for a variety of different uses. Although they are growing in popularity, a lot of people are unfamiliar with how they work.
The biggest benefit of a flexible savings account is that you can save money from your paycheck for the account, without paying taxes on it. Similar to a 401k, you can set a predetermined percentage of your account to go to your flexible savings account. This way, it doesn't seem like as big of a hit to your paycheck each period. This allows people to accumulate money quickly in an account that they can use for a variety of reasons.
Medical Expense FSA
A flexible spending account designed to save for medical expenses is the most common form of FSA. This type of account allows you to save money on a pre-tax basis for qualified health care expenses. This is common because it allows you to save money for your deductible and coinsurance costs. Depending on your health insurance plan, this can amount to a big cost. Therefore, having a medical expense FSA will allow you to budget a portion of your paycheck towards health care costs. Health care costs can be difficult to predict, so having some saved back will be extremely beneficial.
In addition to paying for things like deductibles and co-pays, a medical expense FSA can pay for some other expenses as well. For example, you can pay for dental or vision care even if your insurance plan does not cover these things. You can also buy over-the-counter drugs and first aid kits with funds from your FSA as well.
Dependent Care FSA
Another common type of flexible spending account is the dependent care FSA. A dependent care FSA allows you to spend the money from your account on qualified care expenses for your dependents. The most common form of this is paying for child care. However, it can also apply to adult day care as well. Therefore, if you take care of an older relative, you can use this account to fund their care. It does not apply to nursing homes, however. The ability to contribute to this type of FSA is maxed out at $5000. This is a federal mandate and cannot be avoided.
How to Use FSA's
Once you have the flexible spending account set up, it is extremely easy to use. You can usually access the funds in one of two ways. You can file a claim for the money which involves completing some paperwork. Or you can use an FSA debit card. A debit card is by far the easiest method to access the funds as you don't have to keep up with receipts or file any paperwork. The money is automatically transferred to who it needs to go to and you go on about your business.