Let’s get the Acronyms and Industry Jargon Out of the Way
As we all know, there are way too many acronyms in the employee benefits world, and the industry jargon tends to get pushed out to the general masses for most to chew on and ultimately get confused over. Most industries keep their nonsense internal, but in the benefits space, not so much.
Spending accounts can and do cover various things, but they are all typically referred to as Flexible Spending Accounts (FSAs). The policies must ideally be the same since they share similar titles and acronyms, right?
Actually, very wrong.
This four-part series will discuss the spending account environment and the different accounts that fall within it. These articles aim to provide a helpful, general overview for anyone who can’t remember what these three-letter acronyms mean or how they work.
I have chosen to cover common spending accounts because of their popularity. There are more of these types than other accounts, so they are frequently misunderstood and give little explanation.
We hope that by providing the following, you’ll identify how you or your business can create tax savings and additional benefits for you and/or your workplace. Without any further adieu, let’s dive right in.
First, I want to speak to the naming/nomenclature for the most common spending account we see, the health (or healthcare) Flexible Spending Account (FSA).
What Are Spending Accounts?
To be brief, we’ll discuss several different spending accounts, but first, let’s talk about the acronym. The “S” in the middle of FSA:
It stands for “Spending,” not “Saving,” meaning these accounts are designed to be used or “spent” in a short timeframe. If you are putting money into this type of account, be sure you are not putting in more than you can spend within the allowed timeframe of the plan.
These programs are not designed with long-term planning or savings in mind. If you remember anything from this blog, please let it be that this is a “use it or lose it” program, so be sure not to lose your money. Anytime you see an “F” and then an “S,” it stands for spending.
The Different Types of Spending Accounts
As we’ve alluded to, there are many types of these mysterious flexible “spending” accounts that people love to talk about but ultimately end up confused. Let’s change that here!
Several types of spending accounts allow for funding general health, pharmacy, dental, and vision expenses (aka Healthcare FSA’s). Other spending accounts allow for limited non-health expenses, such as dental and vision only (known as Limited Purpose FSA’s). To continue the confusion, some spending accounts also let you pay for dependent care with un-taxed dollars, known as Dependent Care FSA’s… Did you know that? This is the most underutilized one, and I find it a shame. ☹
When we dig deeper, did you know there are spending accounts that allow you to pay for adoption-related costs (Adoption Assistance FSA’s)? Or super cool catch-all spending accounts that will let an employer reimburse for whatever they want?
Yes, it’s true.
That one is called a Lifestyle Spending Account. It allows a business owner to get super creative and help employees pay for vacations, gym memberships, movies, cell phones, etc. Eligible reimbursements need to be clearly defined when the plan is set up, and then the new benefit is in place that the employer made and is tailored to their staff. No cookie cutter plans are allowed. It doesn’t get any better than that, folks!
So, with all that said, let’s dive into each type of Spending Account and chat about their basic features. We’ll talk about tax benefits (this is not legal tax advice, always talk to your CPA for that) and discuss whether or not the benefits are taxable, if any advanced benefits are available, and if there are any plan maximums in place.
Health Flexible Spending Accounts (FSA)
When referring to FSA’s, most people are referring to Health FSA’s, even though there are many other types of FSA’s. The most common confusion is between this type of FSA and a Health Savings Account (HSA). We’re here to talk about spending accounts today, but HSA’s and the differences in HSA’s and FSA’s will be a future article.
As mentioned, the Health FSA’s are the most common and popular type of spending account. They allow for pre-tax payroll deductions and payments for health, dental, vision & pharmacy-related expenses.
In most cases, you will get a debit card directly tied to the account, so you don’t have to pay out of pocket. In the past, you would often have to pay for an expense, file a claim, and then get a check to reimburse your expenses a week or two later, but thanks to modern technology, that painful pay and get reimbursed later process is for the most part out the window.
Here are some basics and high-level information on Health FSA:
What items can be paid for?
Eligible health, dental, vision & pharmacy expenses
Can it be paid out upfront?
Yes (meaning you can get paid for a big expense on day 1 even if you haven’t completely funded the account yet)
What are the maximum contributions allowed?
$2750 (2022); $2850 (2023)
Are there tax benefits?
Yes, deductions can be set up to be removed from employees’ paychecks on a pre-tax basis meaning the expenses get paid with pre-tax dollars.
Who are they funded by?
Most commonly, employees, but employers can also help fund the accounts.
Are there any “gotchas”?
There are 3:
1) A Health FSA cannot be used alongside a Health Savings Account (HSA).
a) If you have both as an option and have to choose, go the Savings (HSA) route, as long as you are okay with the corresponding required medical plan. The HSA option allows you to keep the funds long-term in the savings environment, but your health plan will not be as rich and will likely not have any copays.
2) This is a big one: This account is a “use it or lose it” type of program. You could lose those dollars if you put too much money into your health FSA and can’t spend it all by the end of the plan year.
b) Depending on how the plan is set up, some allow for extended claims filing timeframes OR rollovers, but the rollovers are partial so contribute carefully!
3) Claims paid through a Flexible Spending Account (FSA) are only eligible for the payment if incurred after you are enrolled and participating in this type of program. You cannot sign up and then pay for expenses from last year. Nice try!! 😉
Limited Purpose Flexible Spending Accounts (FSA’s)
Remember when I said you couldn’t use your Health FSA alongside a Health Savings Account (HSA)? Even though it’s not a common issue, the answer to that conundrum is to enroll in a Limited Purpose FSA. But, remember that this only applies if you want to have a Health Savings Account (HSA) for health expenses and still have a Flexible Spending Account for dental and vision-related expenses). Having these two types of accounts in place (one spending and one saving) would allow you to maximize your potential tax savings ability, but be careful. The same “use it or lose it” rules still apply here for the Limited Purpose FSA.
We don’t see these types of accounts put in place too often other than in cases where business owners, executives, management level folks, or high-income earners want to maximize their overall tax savings. In these cases, the employee usually has a good amount of vision and dental expenses, such as for employees who have large families, possibly with young kids, or require enhanced vision and dental care. The mechanics, maximums, gotcha’s, etc. are all pretty much the same for Limited Purposes FSA’s as outlined above, but I do want to point out a few unique differences:
Items allowed to be paid
Eligible dental and vision expenses ONLY. Payments made through this type of account are not eligible for payment on the health eligibility side (think doctors, hospitals, and pharmacies).
Gotchas: Items to point out:
1) Alongside a Health Savings Account (HSA) can be a limited Purpose FSA; this is why they exist so that you can pay for eligible health expenses through your Health Savings Account (HSA) and your dental and vision expenses through your Limited Purpose FSA
2) Same as above, but a big one to mention again. This account is a “use it or lose it” program. If you put too much money into your Limited Purpose FSA and can’t spend it all by the end of the plan year, you could be out those dollars.
a) Depending on how the plan is set up, some allow for extended claims filing timeframes or rollovers, but the rollovers are partial so contribute carefully!
b) If you max out this account, it could be difficult to max out your claims and get all your money. Instead, it would be in a full-fledged Health Flexible Spending Account (Health FSA), so deposit carefully.
i. Most people do not incur many dental and vision expenses every year. Thus, please contribute wisely!
ii. Potentially ideal for use – someone in the family needs lots of dental work, or someone is going to have LASIK or wears very expensive glasses.
Please feel free to contact us if you have any additional questions after reviewing this article or if you want to get super nerdy about benefits while going down a spending account rabbit hole. We would love that!
Stay tuned next month for part two where we do a deep dive into Dependent Care Flexible Spending Accounts!