You can use a Flexible Spending Account to set aside tax-free money through payroll deductions to pay qualified health and dependent care expenses. Because you don’t pay taxes on the money you contribute, more money is available to you as disposable income.
Your annual contribution is deducted evenly from your paychecks throughout the year. FSA funds are use or lose— any money remaining in your account after the deadline for the plan year’s claims (March 15 of the following year to incur expenses and April 30 to file claims), is forfeited. Your FSA funds do not roll over year to year. You must spend it in the calendar year that you contribute.
There are two types of FSAs to consider:
Health Care FSA
The Health Care FSA pays for eligible out-of-pocket medical, prescription, dental and vision expenses, such as health insurance deductibles, copays for prescription drugs and doctor’s visits, prescription eye wear and supplies, dental/orthodontia expenses and hearing aids. The maximum amount that you can contribute is $2,750 as an individual. Your entire contribution amount is available to use January 1 or within 15 days of enrollment if you are a new employee.
If you enroll in the Choice Savings Plan, you are only eligible to participate in a Limited Use Health Care FSA. Eligible expenses include vision and dental services only.
Dependent Care FSA
The Dependent Care FSA allows you to set aside pre-tax funds for dependent care expenses (typically child care or day care expenses). Expenses can be claimed only for dependents under age 13, elderly dependents or dependents of any age if they qualify as disabled.
The maximum amount that you can contribute each year is $5,000 (or $2,500 if you’re married and filing separate tax returns).
If you’re married, your spouse must be working, looking for work, or be a full-time student for you to be eligible to set aside pre-tax dollars in a Dependent Care FSA.
You can be reimbursed for expenses you incur between January 1 – December 31, 2020, and you can submit claims for reimbursement for 2020 expenses through April 30, 2021.
Limited Use Health Care FSA
If you enroll in the Choice Value Plan or Choice Savings Plan you are allowed to contribute to a Limited Use Health Care FSA for eligible dental and vision expenses. While permissible, contributions may be better placed in an HSA where they have the same tax-advantages and no “use it in 2020 or lose it” rule.