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A flexible spending account, or FSA, is an employee benefit that allows you to set aside tax-free dollars to pay for qualified medical and dependent expenses. While a medical FSA pays for qualified health care costs, a dependent care FSA pays for daycare costs for children under age 13 or older dependents.
If you have an FSA, personal finance expert Suze Orman recommends spending it all before the end of the year.
“As anyone with an FSA should know, money set aside in an FSA can typically only be used for that given year. If you don’t use it, you’ll likely lose that money,” Orman wrote in a July 25 blog post.
Citing an analysis by the Employee Benefit Research Institute (EBRI), Orman noted that about half of people who had set aside money in an FSA in 2022 did not use all of the money in the account, and the average amount they lost to their employers was nearly $450. And it is typically younger workers who lose the most, he added.
As of December 31, 2022, the EBRI database included more than 3.2 million FSA accounts with more than $3.6 billion in contributions. The average FSA contribution was $1,291 in 2022. Eighty-five percent of account holders received a distribution that year. Among those who did, the average distribution was $1,323.
Orman believes an FSA can be a smart financial move, but only if you take full advantage of it. Here are his tips.
1. Take advantage of tax savings. The money you put into your FSA isn’t taxable. For example, Orman explained that if you contribute $1,000 this year, then your taxable income for the year will be $1,000 less. However, you can contribute up to $3,200 in 2024, according to the IRS.
2. Review your plan to see what is covered. Your plan must have a list of qualified expenses. Not all of them will qualify.
3. Use those tax-free dollars to reimburse yourself for qualified expenses. Qualified expenses generally include a variety of health care products and services, including dental care and over-the-counter medications, that health insurance does not cover.
4. Use it or lose it. Most FSAs are “use it or lose it,” meaning you lose any money you don’t use before the end of the year. Orman recommends checking with your employer about their forfeiture rules, as some allow users to carry over some unused funds to the next calendar year.
5. Don’t put too much money into your dependent care FSA. Be careful not to contribute too much toward your care payments this year, as it may affect your ability to claim the federal child and dependent care tax credit next year. If you’ve already contributed a significant amount, see if you can roll over those funds to early next year or prepay some of next year’s costs.
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