Plus, you might spend some of the money on FSA-eligible products related to your diagnosis. Welcome to the club! If you're a first time FSA user, it might be challenging to find the perfect allocation number, but that's okay. Do your best to calculate your contribution number based on last year's health expenses, but don't worry if it's a little low or high. Next year, you'll be able to calculate more accurately. It's okay if you don't find your "ideal" FSA contribution number. The most important thing is that you're starting to save money in your FSA and prepare for your health care expenses.
Your bank account will thank you. From FSA basics to the most specific account details, in our weekly Asked and Answered column, our team gets to the bottom of your most-pressing flex spending questions.
It appears every Wednesday, exclusively on the FSAstore. And for the latest info about your health and financial wellness, be sure to follow us on Facebook , Instagram and Twitter. Learning Center. If employers provide health care FSA contributions, this amount is in addition to the amount that employees can elect. Employees can elect up to the IRS limit and still receive the employer contribution in addition.
Also, to remain an excepted benefit, health FSAs "should never be available to an employee who is not also eligible for the major medical plan regardless of enrollment status ," he said. There are two options for FSA extensions; employers can adopt either or neither, but can't offer both:. Any amount that rolls over into the new plan year does not affect the maximum limit that employees can contribute.
Also issued May 12, and for plan years ending before Dec. These are permanent changes and apply retroactively to purchases beginning Jan. A dependent care FSA is a pretax benefit account used to pay for dependent care services such as day care, preschool, summer camps and nonemployer-sponsored before or after school programs.
Funds may be used for expenses relating to children under the age of 13 or incapable of self-care who live with the account holder more than half the year. In addition, maximum contributions to a dependent FSA may not exceed these earned income limits:.
Employers can also choose to contribute to employees' dependent care FSAs. A separate tax code child and dependent care tax credit cannot be claimed for expenses paid through a dependent care FSA, as "double dipping" is not permitted.
Elder care may be eligible for reimbursement with a dependent care FSA if the adult lives with the FSA holder at least 8 hours of the day and is claimed as a dependent on the FSA holder's federal tax return. Employer-funded parking and mass-transit subsidies are tax-exempt for employees. Using pretax income, employees can also pay their own mass-transit or workplace parking costs through an employer-sponsored salary deferral program.
These expenses include the value of mass-transit passes and van pooling services, and parking on or near the business worksite or a location from which employees commute to work by driving and then using mass transit. The ability to pay transit expenses with pretax dollars, within the annual limit, "should be welcomed by employees with high commuter costs, such as those who rely on urban mass transit systems," said Danielle Capilla, director of employee benefits compliance at Alera Group, a network of insurance and financial services firms.
In , tax legislation eliminated the business deduction for qualified mass-transit and parking benefits. In IRS Information Letter , released September , the IRS was asked whether an employee could roll over unused transit benefits from a qualified mass transit account to a qualified parking account—an issue raised by employees who had formerly taken public transportation to commute but, due to COVID, are now driving to work and paying for parking.
The IRS responded that as long as the employer's plan includes both mass transit and parking accounts in its Section f qualified transportation program, and as long as the maximum limit of the accounts has not been exceeded, the employee could transfer funds from one account to the other. In addition, unused compensation reduction amounts can be carried over to subsequent periods under an employer's plan and used for future commuting expenses, the IRS said, so long as the employee has made a valid compensation reduction election and remains employed by the employer.
Currently, almost one in four Americans use this tax-reduction tool to save on a wide variety of medical expenses, and the numbers are expected to significantly increase over the next few years. With the cost of medical care continually escalating, that can represent a hefty hunk of change for families looking to stretch their dollars. Each year, employees working for companies that offer an FSA must elect to participate and choose how much to contribute. Starting the first day of the plan year, the full annual election amount is available to the FSA participant.
Some vendors allow account holders to set up their FSAs so that common medical expenses — such as a visit to the doctor or a prescription purchase — are automatically sent to the vendor. In some cases, you can use these accounts for regular, qualified medical expenses after you meet your medical insurance deductible.
It is also subject to the "use it or lose it" rule. You may be strapped for cash and unsure how to prioritize an HSA with other savings goals. In this case, make sure you take advantage of your company's k match first, then build an emergency fund and pay off high-interest debt such as credit cards and personal loans.
If you know that you will have medical expenses throughout the year, contribute at least the estimated amount to your HSA. This way, you get a tax deduction for medical expenses that you would incur either way. If you're eligible to contribute to an HSA and can afford to max it out, I highly recommend it!
Even better, if you can afford to pay medical expenses out of pocket, let your HSA dollars accumulate and invest them for future use. If you're somewhere in between contributing what you'll spend for the year and maxing out, consider contributing enough to cover your deductible, then work up to maintaining a balance that will cover your out-of-pocket maximum.
Once you've maxed out your HSA, consider what dental and vision expenses you anticipate in the coming year. If you know that you have major dental or vision work coming up, these accounts are beneficial. Contribute what you expect to spend up to the contribution limit.
When considering how much to contribute to an FSA, think about your past and future medical expenses. Contribute only what you think you'll use for the year. Remember, you can use this account for a host of eligible medical expenses , including dental and vision expenses. Another consideration is your job stability. If you anticipate a move to another company in the next year, make sure you're able to use what you've contributed to your FSA before you leave your current company.
These provisions are retroactive to January 1, and do not expire unless there are future legislation changes. It's important to understand how these accounts work to determine how much to contribute for yourself and your family. Chloe A. Moore, CFP, is the founder of Financial Staples , a virtual, fee-only financial planning firm based in Atlanta, Georgia and serving clients nationwide. Disclosure: This post may highlight financial products and services that can help you make smarter decisions with your money.
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