The funds in a Flexible Spending Account (FSA) can be used to cover most common medical expenses; this includes the cost of eye exams and eyeglasses or contact lenses.
What Is a Flexible Spending Account?
An FSA is a type of tax-advantaged savings account that can be set up through an employer’s cafeteria plan of employee benefits. Through an FSA, an employee has a certain amount of money that he designates to be deducted from his paycheck and diverted into the FSA account. The employee can then draw on the money in the account to cover typical medical and dependent care expenses that are not covered by his insurance plan, such as deductibles, co-pays, or medical or dental expenses that exceed the maximum benefit provided by a health or dental insurance policy.
An FSA offers a tax advantage by virtue of the fact that money contributed to an FSA account is not subject to payroll taxes and thereby offers a significant tax savings for the employee. As of 2015, the minimum annual amount that an employee can designate for contribution to an FSA account is $100, and the maximum annual contribution is $2,500. A maximum of $500 can be carried over from one year to the next. Any funds over the $500 limit are lost. Therefore, it is to the employee’s benefit to make sure that he has made use of most of his FSA funds by the end of the year, although some employers allow claims against an FSA account to be made as late as through the first quarter of the following year.
Expenses That Can Be Paid Using FSA Funds
FSA funds can pay for nearly all ordinary medical and dental expenses, including prescriptions and over-the-counter medications. Eligible FSA expenses include physician fees, dental work, eye exams and glasses or contact lenses, hearing aids, mental health counseling, lab work and chiropractic services.
FSAs can also be used to fund dependent care expenses, such as day care services or care of an elderly parent. However, the most common type of FSA account is the basic health FSA account.