How Flex Funds Work

The Purpose of Flex Spending

With the rising costs of health care and health insurance, it helps to know that you can pay copays and out-of-pocket fees with the money in your FSA.
With the rising costs of health care and health insurance, it helps to know that you can pay copays and out-of-pocket fees with the money in your FSA.
Pablo Cozzaglio/AFP/Getty Images

So how do you know if a flexible spending account can save you money? First, you need to understand how using pre-tax income can help you. The amount you put into your FSA is deducted from your gross income before taxes. So instead of paying income taxes on your full gross income, you pay based on your gross income minus the money you put into the FSA. For example, if you earn $40,000 this year and put $4,000 into your FSA, your gross income is $36,000 instead of $40,000. So using the FSA can help you pay your medical expenses and save on your taxes at the same time.

You can determine how much you want to save with a flex fund each year. There's only one open enrollment period (unless you have a life-changing event, such as divorce, marriage or the birth of a baby), so it's important to think carefully about the amount of money you should contribute. Remember, you forfeit any money you put in but don't use. Currently, the limit is $5,000 per year for Health Care FSAs, and $5,000 for Dependent Care FSAs. So your goal is to determine as closely as possible how much of that money you'll be able to use for eligible expenses. Later on, we'll explore eligible and non-eligible expenses; you may also want to check out an online tax savings calculator.

After determining how much money you want to put in an FSA, you need to contact your employer. Employers should be able to provide information on the different types of flexible spending accounts they offer, the dollar limits and the rules for using the funds, but, here's a list of the most general rules you should understand:

  • Usually, to use money in your flex fund, you have to turn in a claim form and receipts to show the expense. (Some FSAs have dedicated debit cards, but they're exceptions.) You'll be reimbursed for all eligible expenses, up to the amount you contribute for the year.
  • You may use the entire year's amount early in the year, but you must continue contributing until you have put in the full amount.
  • There are different types of flex fund accounts. We'll explore those later, but you must be sure to sign up for the right account, since each has a different list of eligible expenses.
  • The new closing time for using expenses is 10 weeks after the last day of the year, so you can actually use the year's funds up until March of the next year.
  • Any funds you do not file a claim for by March are considered forfeited, and are non-refundable. Be sure you check in toward the end of the year to find the balance on your account; you don't want to lose any of the money you contributed.

It's pretty clear that an FSA is a good investment for tax savings. But how do you know if your expenses are covered under the plan? Read on to learn more about the types of expenses that are eligible for reimbursement.