What Is Covered by Health Flexible Spending Account Dollars?

Flexible spending arrangements (FSA) are a growing component of many employer health insurance plans and come with the added bonus of tax savings. Approximately 35 million working Americans use the accounts, according to the Employers Council on Flexible Compensation. Employers offer FSAs as one component of a health benefit package. Other types of FSAs may be used for child care or other dependent expenses.

Account Details

• An individual funds his spending account through a payroll deduction. Some employers pre-fund employee accounts as a way to offset health plan expenses, such as higher deductibles (a deductible is the amount of money an individual or family must pay before a health insurance plan steps in to pay medical costs). Account money may be used to cover first-dollar medical costs, such as over-the-counter medication. Money in the account usually pays for physician visits, emergency room co-payments, prescriptions or other traditional costs.

Qualified Expenses

• The majority of medical expenses are covered by an FSA, including vision, pharmacy and dental expenses. Some insurers cover additional expenses, such as health club memberships, but only IRS-approved expenses come with tax savings. The IRS considers a pregnancy test kit a medical expense but does not approve maternity clothes, for example. Medical expenses paid by an individual, her spouse and dependents are covered as well.

Tax Benefits

• Money placed in an FSA has similar tax benefits to funds placed in a 401K retirement plan. The funds are deducted from your earning before any tax withholding. An individual who allocates $1,500 to his savings account and pays 25 percent in federal, Social Security and state taxes could expect to save $375 on taxes.

Use It or Lose It

• All of the money in the FSA must be used by year's end or it will be lost. This means an individual must carefully consider how much money should be placed in the account. In some cases, a plan may offer a grace period of 2½ months after the end of the plan year, but the account money may only go toward qualified expenses. A good rule of thumb is to look at the previous year's medical expenses--including drug costs, physician visits and vision and dental costs--as a way to estimate how much you should contribute to the account.