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Basics

Flex-Ed: How to fix mistakes with FSA funding and reimbursements

Mistakes are common. But when you make a mistake with your FSA reimbursements or funding, you need to be able to fix them ASAP, so you're not caught paying for them later. As in, you want to be sure that you're using your FSA correctly so that you're not required to pay your reimbursements back or stuck with money you can't use.

Sure, you can have the best-laid plans, but stuff happens. Instead, take a look at the following scenarios in case you made one of those mistakes, and what you can do about it.

Your receipts weren't clear

Just because you know what you spent your money on, doesn't mean your FSA administrator is clear on it. Yes, you have receipts backing up your purchase but that doesn't mean it automatically counts as solid proof.

Let's say you purchased got a prescription for a bunch of antibiotics at the pharmacy. You decided to submit the credit card receipt to your FSA provider. Unfortunately, that's not enough proof because the IRS requires you have an itemized receipt.

If your FSA administrator comes back to you and says your original receipt isn't acceptable proof, you should be able to resubmit. Now's the time to find that itemized receipt — whether it's your prescription with the price on it, or go back to the pharmacy if you need to and see if they'll print another one for you.

Otherwise, you can submit what's called an Explanation of Benefits (EOBs) that you'll receive in the mail from your health insurance provider -- basically, a fancy way of explaining a part of your transaction. What it needs to include is your name, date of purchase, the provider/retailer's name, price of the item, and the name of the item or service. Don't worry though - this is standard information to be included on all EOBs.

Even if you made the initial mistake, you can still fix it as long as you provide ample proof as quickly as possible.

You overallocated your FSA

Maybe you overestimated how much you'll need and you contributed a bunch of extra money to your FSA. Now you realize, you may not have enough qualified medical expenses to spend it all. The good news is that it's still your money. The bad news is that you're at risk of losing it of you don't take action.

Before assuming you don't have enough qualified medical expenses, make a list of things you may need. Perhaps it's time to replace your broken pair of glasses, or you're eyeing that foot circulator but were scared to make the purchase. Be strategic about what you want to purchase and make sure it's something you need, and you're not spending money just to spend it.

Something else to consider is looking into your FSA plan to see if there's a rollover option — typically up to $500 per year — or you may be able to take advantage of a Grace Period, if you have one, giving you extra time to spend down your funds. This way, you can still keep your cash longer without feeling like you have to buy things you don't need (which you shouldn't do, anyway).

Keep in mind that you won't have both the rollover and Grace Period option, and plans are not required to offer either so map out your purchases depending on what your plan offers.

You submitted an incorrect claim form or have no matching receipts

Don't freak out. If you submitted the wrong form, contact your FSA provider right away and see if you can resubmit. It's as simple as that. However, if you make a purchase and don't have a matching receipt, you may be able to substitute one from another qualified transaction.

Let's say you purchased prenatal vitamins and sunscreen and realized you don't have the receipt. Instead, you may be able to find another receipt for a qualified purchase to offset your original purchase. Maybe you buy additional sunscreen or more prenatal vitamins at a different store and submit that receipt, instead. Note that not all administrators will allow this, so you'll want to contact them to find out about your options.

In some cases you may not even need to submit a receipt, although we always advise that you keep them just in case. For example if you used your FSA debit card to make a payment and at a qualified merchant with the proper system in place, your expense may even be automatically approved without the need for documentation.

Mistakes happen to the best of us. The important thing is to recognize them when they happen, correct course and try not to let it happen again.

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New to FSAs? Need a refresher course in all things flex spending? Our weekly Flex-Ed column gives you a weekly dose of FSA Living 101, offering tips for making the most of your tax-free funds. Look for it every Thursday, exclusively on the FSAstore.com Learning Center.

Accounts

Flex-Ed: Speaking to millennials at open enrollment

Raise your hand if this sounds familiar. You spend hours preparing for a company meeting on employee benefits. But when it's time to share information, some employees are visibly less interested. By the end of the meeting, eyes have glazed over, and attention has disappeared.

Fast forward to open enrollment. Maybe it's a little early to tackle this, but this same group of employees is pretty disengaged. And they are less likely to understand what your company offers. So it's better to start now and avoid confusion later.

Millennials may be first to say, "I've got this." But the truth is, open enrollment can be confusing and stressful. Key details may be glossed over. And as a result, they may be less likely to opt in. Here are some tips on how to spark interest before the onslaught of paperwork begins.

Communication matters

If you're offering the types of benefits millennials value most — great. But do they actually understand what you offer? Communication is critical. Try going beyond in-person meetings, letters, or emails. Share the message in bite-sized pieces through texts, blog posts, or videos. Repeating what matters may be the key to boosting millennial engagement.

Highlight ways to save

Millennials may have a reputation for frivolous spending. But that's not the case with healthcare. Research has revealed nearly half of millennials have skipped or delayed care to save money. Become a trusted resource and advocate by making benefits easier to understand. Break healthcare benefits down into manageable chunks.

Oh, be sure to ditch the industry jargon. These might be common terms to some, but it always helps to decipher things like coinsurance, copayment, or out-of-pocket maximum, providing real-world examples of how each of these will impact their wallets.

Flexible spending accounts (FSAs) are another way to save on taxes. Money shifts into a special account before being paid. Explain the "use it or lose it" rules and why it requires some extra planning. There's no "magic number" that works for all employees. Everyone's needs are different. Ask these questions to guide them through the decision process:

  • How much money did you spend last year? Sifting through old receipts can be a snooze, but it's helpful to have a baseline for planning purposes.
  • Do you have any major health expenses planned? Time to stop putting off that root canal? Or is your family expecting a baby? You're likely to use 100% of the year's FSA money — and more. But if you're expecting routine check-ups, contributing the full amount may not make sense.
  • Does your company offer a high-deductible health plan? A recent survey found most millennials don't understand how they work. To make matters worse, 70% waste up to $750 because of mistakes at open enrollment. Maybe a health savings account (HSA) is a viable alternative.

Grab attention before open enrollment

No one wants to read a stack of papers. Try delivering the information other ways. Consider which benefits are most valuable to millennials and highlight them — more than once. Helping your employees make the most of their benefits could save them a lot of money. Best of all, they may want to stick around longer.

New FSA-eligible arrivals...


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New to FSAs? Need a refresher course in all things flex spending? Our weekly Flex-Ed column gives you a weekly dose of FSA Living 101, offering tips for making the most of your tax-free funds. Look for it every Thursday, exclusively on the FSAstore.com Learning Center.

Accounts

Flex-Ed: It's never too early to map out your open enrollment

Sitting down and looking through mounds of paperwork and websites, and reading confusing jargon isn't the most exciting thing in the world. But you shouldn't let open enrollment wait until it's too late to make a smart decision. Start by considering how your health plan affects you and your family.

We know it's only mid-August. But that doesn't change the fact that you shouldn't wait until the last minute to map out your open enrollment benefits. There are lots of benefits to do doing so -- the biggest one being your health. And you may save some money as well. Just think about when you have a medical emergency and have to take out a loan to pay down your bills. Or when you've had opportunities to enroll in FSAs in the past, and chose not to.

Don't make the same mistakes by putting these decisions off until "later." Instead, get a head start and have your ducks in a row, so when it comes time to choose a plan, you can make the best choice for your needs.

Learn from past open enrollment mistakes

We're not recommending you beat yourself up. We're just saying this is a great time to assess what worked -- and what didn't -- with your past health care spending decisions. Think about how you came to decide past health plans and see what you could have done differently.

First, go back and think about why you picked a certain plan. Is it because it was the least expensive? Were tax-free spending or savings options on your list of priorities?

Once you have those answers, then think back and figure out whether you looked at all the features available and what would happen if you had to pay out of pocket. You can also think about how you're currently taking advantage of the plan. Have you been maximizing your benefits? Do you regret not opening a FSA?

Once you have this locked down, you can make a list of what you're looking for in a health plan -- the things that might fall under that "regret" umbrella. If you end up choosing the same one you currently have, then at least you have a good idea of what to expect in the coming year. If not, you'll know exactly what to look for when upgrading to a new one.

Pretend you're applying for a new health plan each year

Even if your employer allows you to passively continue your health plan selection every year, don't. Be more proactive, even if you're content with what's offered. In other words, you want to pretend you're applying for a new plan each year, for the exact reasons mentioned above.

Doing so will also give you a chance to see if there are any perks or benefits that you missed, and helps with better communication between you and the HR department. That's because you'll remember to update relevant information and ensure you're asking the right questions to reassess your choice.

Don't be afraid to be "confused"

Pretending you're confused is a mindset shift you can take in order to make sure you're clear on what it is you're getting into. The premise is simple: read the entirety of your health plan and assume you know nothing. Look at every piece of jargon and prepare a list of questions to ask the open enrollment representative.

For example, one of the best questions you can ask is ones relate to cost benefit trade-offs. Is there a way you can have a representative answer your questions about your specific situation and predict a cost calculation? What if you want to an FSA? Or does it make more sense to choose a qualified high-deductible health plan with an HSA?

No, you're not going to annoy anyone in your HR department (at least it shouldn't). After all it is your health and your wallet. Treat open enrollment as a year-long planning event and you'll reap the benefits in the year to come.

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New to FSAs? Need a refresher course in all things flex spending? Our weekly Flex-Ed column gives you a weekly dose of FSA Living 101, offering tips for making the most of your tax-free funds. Look for it every Thursday, exclusively on the FSAstore.com Learning Center.

Basics

Flex-Ed: Getting new graduates off to a good financial start

Graduation season has come and gone, and while we're still celebrating our accomplished kids, the real work starts now. Parents can get a bit emotional sending our children off into the world. After all, there are a lot of responsibilities that come with being an adult, such as learning to deal with finances.

Your child may already know how to budget, and might understand the basics, but there are a lot more considerations to think about than ever before, especially if they've been under your health care plan.

If you can drop a little financial wisdom before they leave the homestead, it can pay huge dividends later in life. Here are a few suggestions on what to teach them.

Budgeting for health insurance

Your child may have been lucky enough to latch onto your health plan until now, or you may even continue to cover them if you wish under most plans until they're 26. If not, this new expense can cost more than what some new graduates may think, and they may be caught off guard if you don't help to prepare them..

If their employer provides health care insurance, have your graduate go through all the options available to see how much they could save. If they choose a more traditional health plan and have the option to select a flexible spending account (FSA), then that's another good tip to pass along.

Saving a few bucks on sales tax might not seem that important to a generation who dumps millions of dollars on Fortnite, but once they see monthly and yearly savings, the importance will become alarmingly clear.

Understanding the consequences of high-interest debt

Ideally your child didn't graduate with any debt. But this isn't always an "ideal" world. If they do have debts to pay down, then it's important to sit them down and discuss what it means to pay it back on time.

The Department of Education's StudentLoans.gov website is a great resource for calculators and other educational material. It is also a good place to see if there are any incentives from the Federal government to help limit a graduate's monthly loan payments.

Of course, it's important to prioritize. As in, they'll first need money to cover their living expenses (e.g. rent, food and transportation) and then the rest to pay down loans. It's best to help them figure out a few calculations to see if paying the minimum payments or slightly more will help them become debt-free faster based on what they can feasibly afford.

Saving for retirement

Maybe this isn't a topic we cover much on the FSAstore.com Learning Center, but we do spend a lot of time discussing retirement on our sister site, HSAstore.com. And it's important for graduates to understand, regardless of which tax-free health care accounts they choose. Because it doesn't matter if retirement seems like a faraway destination, it's never too early to start setting aside money for it.

Even a small amount of money compounded over time in an investment account will reap big rewards in 15 to 20 years.

There are accounts like employer sponsored plans (which financial experts recommend participating in as you'll get free money from your employer) and other traditional retirement accounts like an IRA. But, if your child is healthy and putting money in something like an HSA, he or she can invest that cash once the account reaches a certain threshold. In this case, they're saving on taxes, health care costs and investing in their retirement.

We'd love to help our children get off on the right foot as they set out into the world. Teaching them financial lessons and how it applies to their lives is no doubt invaluable. Then you can rest better knowing your graduate is entering the world a little more financially savvy.

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New to FSAs? Need a refresher course in all things flex spending? Our weekly Flex-Ed column gives you a weekly dose of FSA Living 101, offering tips for making the most of your tax-free funds. Look for it every Thursday, exclusively on the FSAstore.com Learning Center. And for the latest info about your health and financial wellness, be sure to follow us on Facebook, Instagram and Twitter.

Living Well

Flex-Ed: How to live and save like a superhero

At the time this piece is being published, The Avengers just finished dominating the box office, the X-Men are about to start, Shazam made a brief impact, and approximately 129 other superhero films will hit the streets before the holidays.

So, with all the recent grads about to start their adult lives (and with superheroes on everyone's brains) we figured it might be good to share some scrimping and saving tips to help everyone live and save like a financial superhero.

Remember, we're not financial pros -- you should speak with one before making any decisions about your own planning. But the following tips helped us get ahead, because if you live and save like a superhero, you'll be ready to rise to the occasion and have a better endgame.

(Yeah, we know what we did there…)

Enemy #1: Debt

Debt is a sneaky villain. When you first meet debt, it seems charming, funny and even kind. It's a villain in disguise. No matter how many times debt tries to tempt you, it's important to resist because financial superheroes have to stay lean and ready for action. Even though debt might seem harmless, it actually causes superheroes to become slow and sluggish.

How to conquer debt: If you've attended college, bought a car or experienced a period of unemployment, you've probably had firsthand experience with debt. When I graduated from college, I had nearly $14,000 of student loans. Even though that's less than the national average of nearly $30,000, it felt like a huge amount, especially because up until that point, I had never earned that much money in a single year.

I used all of my human skills to pay it off as fast as possible. I lived with roommates, rode my bike to work, worked an extra job and tried to avoid lifestyle inflation as much as possible to pay off my loans. Within two years of graduating, I was debt-free. Whether you have a goal to become debt-free or to make payments on time, the most important thing is that you have a plan.

Enemy #2: Laziness

If you're anything like me, battling the villain of laziness usually looks a lot like battling myself. The lazy villain is the one that tries to convince you that financial decisions are too complicated to deal with and you're better off just ignoring them altogether. If that sounds familiar, you're not alone. Most of us have come face to face with this villain before.

How to put a stop to laziness: If you feel like you're being financially lazy, then that probably means that you left free money on the table. Depending on your employer, "free money" might mean a 401(k) match that you're not earning or tax savings that you're missing out on because you don't have a tax-free health spending account.

Overcoming laziness (and fear) around money is tough. In fact, I had to miss out on thousands of dollars in savings before I finally opened a FSA this year. But now that I'm (finally) paying for my health care costs through my FSA, I've been able to free up money for new running shoes and I'm halfway to my savings goal for a new phone.

Sometimes you have to learn from mistakes in order to change. But when it comes to overcoming laziness, I've found that the best solution is action. Sometimes a tiny first step is all the momentum you need to get going.

Enemy #3: Short-sightedness

The short-sightedness villain is the one that convinces you that life is tough and it's okay to just focus on the present. After all, the future isn't guaranteed, right? The problem with this mindset is that it's hard to resist. After all, it's tempting to live in the present, focus on your current needs and ignore the future.

How to thwart short-sightedness: Short-sightedness can look different for everyone, but for a lot of us it involves willfully ignoring our future selves. More specifically, it usually means that we aren't saving for retirement. It's hard to prioritize your future self when your current self is struggling to pay the bills, but saving for retirement is one of the ways to break the cycle of financial stress.

It might sound counterintuitive, but the earlier you can start saving for retirement (whether that's in your 20s, 30s or 40s) the easier it will be to actually retire one day, and that's something worth fighting for.

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New to FSAs? Need a refresher course in all things flex spending? Our Flex-Ed column gives you a dose of FSA Living 101, offering tips for making the most of your tax-free funds. Look for it every Thursday, exclusively on the FSAstore.com Learning Center.

Basics

Flex-Ed: 4 common FSA misconceptions

We get it. FSAs can be confusing. Between the eligibility lists, the potential to roll over some of your unused funds, even contribution limits, your FSA may be more stressful than anything else. (Though there are some FSA-eligible items that can help combat that.)

We compiled a list of four common FSA misconceptions, from where your unused FSA funds end up to the real rules about stockpiling. The more you know, the farther your FSA can go.

Misconception #1: It's your employer's decision to reclaim your unused FSA funds if you miss the deadline.

This rule comes from powers greater than the occupants of the corner offices. According to IRS rules, any FSA funds that aren't spent before your plan deadline (or after a grace period, if your plan has one) goes back to your employer. This money can also roll over to the following year's account, giving users even more flexibility with their flex spending

Did you know that more than $400 million in FSA funds are lost by FSA account owners each year? If you remember nothing else about your FSA, remember this: use it or lose it.

Misconception #2: Your company can spend your unused FSA funds however they want.

Your company uses reclaimed, unused FSA monies to help offset the cost of administering the FSA plan or to pay off any deficits. They can also return the money to employees via what's called pooling. But the latter is rare, so don't count on it. (Sorry.)

Sure, it can be frustrating that your company gets first dibs on your unused FSA funds. But keep in mind that they may take a loss by offering an FSA plan to employees. For example, if you use all your FSA funds in the early part of the year then leave the company, your employer has to shoulder that balance.

Misconception #3: I can wait until the end of the year, then blow my FSA funds on the eligible items I'll need the next year right before the deadline.

While not expressly forbidden by the IRS, this is definitely frowned upon. Here's why: Your FSA was made available to purchase the products you need for the specific timeframe, like the copay for your annual physical, your monthly supply of contact solution, or the sunscreen you'll need for your beach trip this summer.

FSAs are meant to alleviate the day to day financial burden of health-related items and services, like picking up a prescription, grabbing cotton balls, buying your allergy medication. They're not intended to be a means for buying a year's supply of nasal spray in one fell swoop. Plus, that stuff expires, anyway.

Misconception #4: As long as my purchase is similar to an FSA-eligible item, I should be covered.

While this misconception is understandable, the rules about what is FSA-eligible – and what isn't – are pretty cut and dry, and there isn't much ambiguity. For example, prenatal vitamins are covered because they're considered medically necessary for healthy pregnancies. But traditional vitamins aren't, because they're not directly connected with diagnosing, preventing or managing a specific medical condition.

Diapers are also confused, since standard diapers don't qualify, but training pants (like Pull-Ups) do, because they're used to prevent bedwetting and incontinence.

These are just a few examples. Check out our eligibility list if you're unsure, because it's better to be FS-safe than sorry.

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New to FSAs? Need a refresher course in all things flex spending? Our Flex-Ed column gives you a dose of FSA Living 101, offering tips for making the most of your tax-free funds. Look for it every Thursday, exclusively on the FSAstore.com Learning Center.

Living Well

Flex-Ed: How my FSA paid for my son's birth

With a flexible spending account (FSA) it's usually required that you use your FSA funds within the plan year for which you contribute them, which can be a tough sell if you're generally healthy and don't have any planned health care needs.

But if you typically spend a lot on health care costs or you're already working on saving for a major surgery or procedure, it could be a no-brainer.

That was the case for me in 2015 when my son was born. By using an FSA to cover most of the hospital costs, it not only saved us money on taxes but it also simplified the payment process.

My story

Leading up to my son's birth, my wife and I weren't financially prepared. We had been saving up for over a year to pay for the hospital bill. But we didn't anticipate how much it would cost for regular trips to the OB/GYN and other common expenses you incur as you get ready for a new child.

As my wife's due date grew closer, I began to panic. In November 2014, however, I learned that my company offered an FSA. As I did some research, I also learned that you can use these pre-tax FSA funds to pay for certain eligible medical expenses. These expenses include the costs of my wife's delivery and hospital stay.

In 2015, you could contribute up to $2,550 to an FSA (the FSA contribution limit is $2,700 in 2019) and my employer at the time offered to match up to $1,000 in my contributions (which could be in excess of the limit, although I stuck with the $2,550).

I'd get the $2,550 up front in an account with a debit card, and I'd make my portion of the contributions over the course of the year. This meant that my employer would deduct $129.17 from my paychecks every month to "fund" the account (based on my portion of $1,550).

My son was born in February of that year, and after we drained our FSA, we were only on the hook for a few hundred dollars more. Fortunately, we had enough cash in the bank to pay the remainder of the bill.

Because of the way FSAs are designed — we got the full $2,550 at the beginning of the year — paying for my son's birth was a lot less stressful.

If we didn't have an FSA, we would have needed to get on a payment plan with the hospital. This process would have required us to shift around our budget and remember to make payments each month.

But with the FSA, I was able to pay the bill in full as soon as I got it. And while we were still technically making "monthly payments" through the FSA contribution from my paycheck, we had already adjusted our budget to accommodate the deduction.

That's not even mentioning the fact that the FSA funds were from pre-tax contributions, which saved us a few hundred dollars in taxes.

The bottom line

FSAs aren't for everyone, but the way they're designed can make it easy to manage your medical bills. By getting access to the full annual contribution at the beginning of the year, you don't have to worry about how you're going to cover unexpected health care costs. And if you're already anticipating some health care costs, it can make it easier to plan for them.

In the end, the important thing is that you can afford your medical bills, and an FSA can help you do that.

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New to FSAs? Need a refresher course in all things flex spending? Our Flex-Ed column gives you a dose of FSA Living 101, offering tips for making the most of your tax-free funds. Look for it every Thursday, exclusively on the FSAstore.com Learning Center.

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Basics

Flex-Ed: Think before you "double dip" with your FSA!

Whether you're new to flexible spending accounts (FSAs) or consider yourself to be a tax-free wizard, you've probably been warned about "double dipping." And if you've read the fine print on any claim you've submitted, you may have already stated you won't double dip.

Basically, double dipping is being reimbursed for the same expense twice, which can happen a lot of ways when managing your FSA. While it's not technically illegal, it's highly unethical and could get you in serious trouble with your employer.

Why? Because by claiming FSA reimbursement you're unable to seek payment for things already paid for pre-tax, or things you intend to pay with another tax-free health account. This can happen without even knowing it.

It's up to your employer to hire an administrator to make sure plans are compliant with the IRS. The IRS says employers (or administrators) have to ask for a written guarantee by the participant that they will not double dip.

If double dipping goes by unnoticed by the administrator, the whole plan could be considered non-compliant and everyone in your company could lose the benefit.

Even worse, if the FSA plan was found to be out of compliance, all those tax-free benefits could instantly become taxable to employees. And we wouldn't want to be the person responsible for that mistake. So, let's explore the most common ways double dipping can happen and how you can avoid it.

Double expensing

One of the most common forms of double dipping is by paying for an FSA-eligible expense with your FSA card, and then submitting the same expense for reimbursement. Most benefits administrators can catch these mistakes pretty quickly. But if a claim does go through and you get reimbursed twice for the same expense, you'll have to pay it back to your administrator if they become aware of the issue.

Doubling expensing on separate accounts

Let's say you and your spouse each have FSAs through your respective employers. If you pay for a copayment or FSA-eligible product and submit a claim for that expense under both accounts, this is another clear example of double dipping.

To avoid this, make sure to keep your FSA claims separate for each account to avoid confusion.

Wellness plan double dipping

Employee wellness plans have become popular in the last few years. But this has created new ways to commit some financial foul play. According to Business Management Daily, the IRS identified wellness plan double dipping as something to watch for.

Basically, employees are paying for wellness program premiums with tax-free funds, and then getting these premiums reimbursed. Technically, wellness programs are "employer contributions," and can't be reimbursed through plans like FSAs or HSAs.

Double dipping can be an honest mistake, but if you make a real effort to double your reimbursements for qualifying healthcare expenses, you're probably not going to get away with it. And I can't imagine anyone wants to deal with the IRS (or an angry HR department) any more than they already do.

Stick to the honest path: Use your FSA card whenever possible, and keep your receipts organized to avoid any issues down the line.

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New to FSAs? Need a refresher course in all things flex spending? Our Flex-Ed column gives you a dose of FSA Living 101, offering tips for making the most of your tax-free funds. Look for it every Thursday, exclusively on the FSAstore.com Learning Center.

Accounts

Flex-Ed: Using an FSA to cover medical costs for adults with disabilities

While it's fairly well-known that FSA holders can use the funds to pay for eligible medical expenses on adult children through the age of 26 (for FSA only) or who are tax dependents, what about adult dependents with special needs? Per the IRS, if your child is considered "completely and permanently disabled," you can claim your child as a dependent, regardless of age.

The definition of "disabled"

There are many accepted terms for people with special needs, but in the eyes of the IRS, "disabled" is still the term of record. Someone is considered completely and permanently disabled if they cannot engage in substantial activity due to a mental or physical condition; and it has been determined by a medical professional that the condition will last at least a year, if not for the rest of the person's life.

Use your funds to pay for qualified health expenses

If your dependent is a disabled adult, you'll be able to use your FSA funds to pay for eligible expenses, which might include: Special equipment, prescription medication, medical supplies, and doctor's visits. Money from your FSA can also be used to pay for long-term care insurance you might want to purchase for your adult dependent with special needs.

Dependent Care FSAs

If your employer provides you with the option, you can open a Dependent Care FSA (DCFSA). With a DCFSA, you can set aside pretax dollars to cover eligible expenses of a disabled dependent who is not able to care for themselves physically or mentally.

While the amount you can contribute to a DCFSA is ultimately set by your employer, the maximum set by the IRS is $5,000 for individuals and married couples filing jointly, and $2,500 for married couples filing separately.

Know your tax breaks

Besides claiming your adult child as a dependent on your taxes, there are a handful of tax breaks that come with dependents that have special needs:

  • An adoption credit for adopting a child with special needs
  • Earned Income Tax Credit (EITC), if you meet the other requirements
  • Child or Dependent Care Credit: If you hired someone to come to your home to care for your special needs dependent (not to be used in conjunction with a DCFSA)
  • A credit for attending medical conferences that relates to your dependent's medical condition

What's more, your adult dependent might qualify for the following deductions:

  • A higher standard tax deduction if you're legally blind
  • Certain disability-related payments might be excluded from gross income

Consider an HSA

While it's not typical for us to recommend as an FSA-focused site, in these situations, maybe an FSA isn't the right answer. Instead, it might be worth looking into a health savings account (HSA). These accounts have a handy triple-tax advantage:

  • Your qualified contributions are made with pretax dollars
  • Money in your account grows tax-free
  • You don't pay taxes on HSA funds used to pay for qualifying health care expenses

(Note: You can estimate how you can save on taxes with an HSA with our HSA Tax Savings Calculator.)

HSAs can only be funded if you have a high-deductible health plan (HDHP). The 2019 contribution limits for HSAs are $3,500 for those participating in the HDHP as individuals, and $7,500 for those participating as families.

As those with special needs have additional costs of living, such as special housing, medical devices and equipment, and higher medical expenses (i.e., more frequent and specialized doctor's visits, prescription medication), any tax savings from your HSA or FSA funds will come in handy. Plus, it'll help your dollar stretch farther.

Knowing how to make the most of the tax-free funds (from an FSA or HSA) to help pay for the health care costs of your special needs dependent will help you make the most of your money.

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New to FSAs? Need a refresher course in all things flex spending? Our weekly Flex-Ed column gives you a weekly dose of FSA Living 101, offering tips for making the most of your tax-free funds. Look for it every Thursday, exclusively on the FSAstore.com Learning Center.