Healthcare Flexible Spending Accounts (HCFSAs): Everything You Need to Know

Introduction

With healthcare costs on the rise, employees are constantly searching for ways to save money on medical expenses. One of the most effective tools available is the Healthcare Flexible Spending Account (HCFSA). HCFSAs offer tax advantages that can help you stretch your healthcare dollars further. However, they come with specific rules, contribution limits, and deadlines that can be confusing.

In this blog, we’ll cover everything you need to know about Healthcare FSAs, from understanding how they work to making the most of this valuable benefit. Whether you're new to HCFSAs or looking for ways to optimize your current account, this guide will provide you with the insights you need.

What Is a Healthcare Flexible Spending Account (HCFSA)?

A Healthcare FSA (HCFSA) is a type of employer-sponsored benefit plan that allows employees to set aside a portion of their earnings, on a pre-tax basis, to pay for qualified medical expenses. The money you contribute to an HCFSA is deducted from your paycheck before taxes are applied, reducing your taxable income and saving you money.

How Does a Healthcare FSA Work?

1. Pre-Tax Contributions: During your employer’s open enrollment period, you decide how much to contribute to your HCFSA for the upcoming year. This amount is deducted from your paycheck before taxes are calculated, lowering your taxable income.

2. Full Amount Available on Day One: Unlike other types of accounts, with a Healthcare FSA, your entire annual election amount is available on the first day of the plan year, even if you haven’t fully contributed the amount yet.

3. Eligible Expenses: You can use HCFSA funds for a wide range of medical, dental, and vision expenses not covered by insurance.

4. Use-It-or-Lose-It Rule: HCFSAs are subject to the "use-it-or-lose-it" rule, meaning any unused funds at the end of the plan year may be forfeited unless your employer offers a grace period or a carryover option.

Benefits of a Healthcare FSA

1. Significant Tax Savings

• Pre-Tax Contributions: Contributions to your HCFSA are made with pre-tax dollars, reducing your taxable income. For example, if you earn $50,000 annually and contribute $2,000 to your HCFSA, your taxable income is reduced to $48,000.

• Tax-Free Withdrawals: When you use your HCFSA for eligible expenses, withdrawals are tax-free. This means you won’t pay taxes on the money you use to cover medical costs.

2. Immediate Access to Funds

Unlike Health Savings Accounts (HSAs), where you only have access to the funds you've contributed so far, an HCFSA gives you access to your full annual election amount at the start of the plan year. This can be particularly helpful for managing unexpected medical expenses.

3. Flexibility to Cover a Wide Range of Healthcare Expenses

HCFSA funds can be used for various out-of-pocket healthcare costs, such as:

• Deductibles and co-pays

• Prescription medications

• Dental procedures (e.g., fillings, crowns, orthodontics)

• Vision care (e.g., eyeglasses, contact lenses, eye exams)

• Medical equipment like crutches, bandages, and blood pressure monitors

What Are Eligible Expenses for a Healthcare FSA?

Knowing which expenses qualify for HCFSA reimbursement is crucial to maximizing your savings. Here’s a breakdown of common eligible expenses:

Medical Expenses

• Doctor visit co-pays and deductibles

• Preventive care services (e.g., vaccinations, screenings)

• Prescription medications

• Medical procedures (e.g., surgeries, lab tests)

• Mental health services (e.g., therapy, counseling)

Dental Expenses

• Routine cleanings and exams

• Fillings, crowns, and root canals

• Orthodontics (braces and retainers)

• Dentures and dental implants

Vision Expenses

• Eye exams and vision correction procedures (e.g., LASIK)

• Prescription eyeglasses and sunglasses

• Contact lenses and lens solution

Over-the-Counter Medications and Medical Supplies

• Pain relievers, cold medications, and allergy treatments (with a prescription)

• First aid supplies (e.g., bandages, gauze, and antiseptics)

• Medical devices like thermometers and blood pressure monitors

Contribution Limits for Healthcare FSAs

For the 2024 plan year, the IRS has set the maximum contribution limit for Healthcare FSAs at $3,200 per employee. It’s important to determine your healthcare expenses for the year and set your contributions accordingly during open enrollment.

How to Estimate Your Contribution Amount

• Review your past healthcare expenses to get an idea of your annual out-of-pocket costs.

• Consider upcoming medical needs, such as planned surgeries, dental work, or new eyeglasses.

• Remember, over-contributing can result in losing unspent funds due to the “use-it-or-lose-it” rule, so be conservative if you’re unsure.

The “Use-It-or-Lose-It” Rule: What You Need to Know

One of the most challenging aspects of HCFSAs is the “use-it-or-lose-it” rule, which means that if you don’t use all of your funds by the end of the plan year, you may forfeit them. However, employers may offer some flexibility:

1. Grace Period

• Some employers provide a grace period of up to 2.5 months after the end of the plan year, allowing you extra time to incur eligible expenses.

2. Carryover Option

• Alternatively, some plans allow you to carry over up to $610 of unused funds into the next plan year.

Pro Tip: Confirm with your HR department whether your employer offers a grace period or carryover option.

How to Maximize Your Healthcare FSA

To get the most out of your HCFSA, follow these strategies:

1. Plan Your Expenses Carefully

• Review your annual medical needs and estimate your contributions to avoid overfunding your account.

• Schedule elective procedures or exams before the end of the plan year to use up remaining funds.

2. Track Your Spending

• Use online tools or mobile apps provided by your FSA administrator to monitor your account balance and spending.

• Keep receipts and documentation for all eligible expenses, as these may be needed for reimbursements or audits.

3. Use Funds for Preventive Care

• Use your HCFSA for preventive services like check-ups, vaccinations, and routine screenings, which can help avoid costly treatments in the future.

Frequently Asked Questions About Healthcare FSAs

Can You Change Your Contribution Amount Mid-Year?

Typically, you can only adjust your contributions during the open enrollment period. However, if you experience a qualifying life event, such as getting married, having a child, or a significant change in employment status, you may be able to modify your contributions.

What Happens to Your HCFSA if You Change Jobs?

If you leave your job, you may lose access to your HCFSA unless you elect COBRA continuation coverage. Be sure to spend any remaining funds before your departure to avoid losing them.

Can You Have an HSA and HCFSA at the Same Time?

No, you cannot contribute to both a Health Savings Account (HSA) and a Healthcare FSA simultaneously. However, you can have an HSA alongside a Limited Purpose FSA, which only covers dental and vision expenses.

Conclusion: The Value of a Healthcare FSA

A Healthcare Flexible Spending Account is a valuable benefit that can help you save on healthcare costs while lowering your taxable income. By understanding how HCFSAs work and leveraging strategies to maximize your savings, you can effectively use this account to manage your healthcare expenses. 

If you have any questions or want to learn more about how to optimize your FSA, feel free to contact us at info@zygic.com.