In an earlier post about getting the most bang for your buck with your health care expenses, I mentioned FSA’s as one of your first tools to save some tax dollars.

If you have already started the process of setting up an FSA or are just not sure about them yet, here are some of frequently asked questions that may help clear anything up.

Flexible Spending Account Frequently Asked Questions

I am not a tax professional, or legal counsel, so please consult with your advisor before acting on any tax advice.

1)What is a flexible spending account(FSA)?

A flexible spending account is a voluntary plan that provides the opportunity to convert part of your salary into tax-free benefits.

The spending account will allow you to set aside pre-tax dollars from your paychecks to cover eligible health care expenses for medical, dental, vision and more.

2)If I put part of my salary into a FSA, won’t I make less money?

Your spendable income may actually increase by using an FSA. Lets look at an example.

Without FSA:

Taxable income of $50,000

FSA Contribution: $0

Subtract Federal and Social Security Taxes: $13,697

Health expenses: $2,000

Spendable income: $34,303

With FSA

Taxable income of $50,000

FSA Contribution: $2,000

Taxable income is now: $48,000

Subtract Federal and Social Security Taxes: $12,983

Spendable income: $35,017

SAVINGS of $714

****This is just an example of typical tax savings. Actual results may differ depending on your exact situation.

3)Why should I bother with the FSA when I can just take a deduction on my medical expenses on my tax return?

Medical expenses have to exceed 7.5% of your Adjusted Gross Income to be deducted on your tax form. FSA’s do not have to exceed that level. If your AGI is $50,000, than your expenses have to exceed $3750.

***As mentioned above, speak to your accountant to see how this will impact your overall situation.

4)Does a flexible spending account replace my existing insurance plan?

No, the FSA is meant to supplement those plans and provide a way for you to pay for any uncovered expenses on a pre-tax basis.

Always submit your claims to your primary insurance carrier and any out of pocket costs you may be paid for by your FSA.

5) Does that mean the FSA will pay my doctors for me?

No, you will have your own checkbook or debit card and you will need to make payment to the provider.

6) Are expenses that I paid with my FSA deductible on my tax return?

No, you get a deduction for what you deposit into the account so you cannot deduct it again.

7)How long is the FSA in effect for?

FSA’s will run calendar year and you must enroll every year and decide how much you will contribute to the plan. Your contributions generally cannot be changed during the year except in the instances below.

In the event of divorce or death of a spouse, you have the option to change your contribution at that time also.

8)What if I don’t spend all the money in the account? Can I use it next year?

No, unfortunately any unused money does not rollover into the next year. For this reason, you must be careful not to put too much into the account so you don’t waste any money.

9)I have unused money in my account. Where did it go?

If you did not spend your money before the end of the plan year, the money gets forfeited to your employer and is under strict regulation by the IRS.

10) What else am I missing?

In addition to the use it or lose it rule, keep in mind that since your contributions are going in pre-tax, your future social security benefits may be affected.

11)Exactly what expenses can I reimburse myself for?

The IRS has a nice guide on FSA’s and what is eligible. I recommend reading through the guide. Additionally, they have removed some expenses from the eligibility list like over the counter prescriptions.

Publication 502 Medical and Dental Expenses

Publication 969 Health Savings Acccounts and Other Tax-Favored Health Plans

Information on changes to the FSA in 2011

The list below was taken from Publication 502 and will link directly the the IRS webiste.