Your health insurance coverage plan may offer you the ability to set aside some of your income to pay for future healthcare costs. The money is deducted from your paycheck (and income for tax purposes) and put into an account called a Flexible Spending Account or FSA.
How FSA Contributions Work
Each year you can have flexible spending account (sometimes also called a flexible spending agreement) contributions automatically deducted from your paycheck into your FSA. This process is just like your 401k contribution: the money comes out pre-tax and lowers your taxable income, and the contribution is automatically completed by your employer.
The process is similar to health savings account with one major difference: your flexible spending account money has a time limit to be used.
Do FSA Funds Expire?
HSA and FSA accounts are very similar: they are tied to your health insurance or employment, they allow you to set aside pre-tax funds for healthcare costs, and you are limited on how much you can contribute to each account.
This can lead to some confusion, but there is one significant difference you must be aware of: flexible spending account funds must be used by December 31st of each year. If there are any funds left in your account you lose them. How do you lose them? Usually they are absorbed by the company administering your FSA plan, but sometimes they are put into an income pool that is shared with all participants. That means all of your hard earned money can be completely thrown away if you don’t use the money.
But how much money are we talking about potentially losing each year? It depends on how much you can contribute.
When Do I Lose My FSA Contributions?
When exactly your FSA contributions expire is dependent on what is in your company’s plan. Some companies set the limit to the last day of the year, but there is a provision that can be included called the grace period.
This grace period was a reaction to public outcry to losing funds – their hard earned income – at the end of the plan year. Plans that include a grace period usually give employees up to March 15 of the year following the current plan year to use the current year’s funds. This can help if you contribute a lot of money but end up not needing to use the funds or if you forget to use it by the end of the year.
What are FSA Contribution Limits for 2013?
For 2013 you may contribute $2,500 to your flexible spending account to cover your healthcare costs. This is a dramatic change from prior years where there was no limit regulated (although most employers capped your participation at $5,000).
A recent legislative change has put a cap into place after finding that almost half of all FSA eligible employees never contribute to their FSA, and a small portion overall contributed more than $2,500. The lower cap standardizes the limit as there was no regulated cap in the past. It also limits the amount of money plan participants could lose if they fail to use all of the FSA funds by their plan’s deadline.