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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.

Accounts

Asked and Answered: How should I handle my FSA when going through life and career changes?

A little-known fact: Your entire year's worth of allocated FSA funds is available to you on the first day of the plan year. So, even if you've only contributed a few paychecks' worth so far, if you need to use the funds for a larger qualified expense, you're able to do so -- you'll just "pay back" the account over the rest of the year through your already planned payroll deductions.

This is a great perk for those situations. But, life isn't a straight line, and sometimes things happen -- unexpected expenses, relocation, etc. -- that can get in the way of your planning and budgeting. If your life doesn't always stay on the straight and narrow, check out these tips to stay on target.

Consider lifestyle changes

If you're relocating to a larger, more-expensive city, you want to take into account a higher cost of living. For instance, let's say you're uprooting from Springfield, Missouri, to Brooklyn, NY. As the cost of living is nearly double in the Big Apple, you'd need to increase your salary two-fold to enjoy the same standard of living. Even if you're getting a bump in pay, you'll want to create a spending plan accordingly.

(Please note: If you switch jobs -- and health coverage -- your FSA stays with your employer. Any expenses you had prior to leaving are fine, but these funds aren't transferable, and don't "come with you" if you switch jobs.)

If you're expecting a lifestyle change like a move, you might want to use the funds in the FSA to help pay for out-of-pocket medical expenses. This way, more of your take-home pay can go toward your living expenses. Need to spend more on rent, bills, transportation and food? Then use the money in your FSA toward qualified medical supplies and other out-of-pocket health care costs.

Stay on top of eligibility

It's always good to know what's eligible -- and it changes pretty often (our "New Arrivals" section is a pretty good barometer for what's up). Just because something isn't considered preventive medicine last year doesn't mean it doesn't fall under preventative medicine this time around. By knowing exactly what's eligible, you can put the money that would otherwise be sitting in your FSA to good use.

Divvy up your funds

Figure out what your medical expenses might be for you and your family for the rest of the year. Then allocate the money in your FSA accordingly. How you want to divvy up the funds is based on your personal situation and different needs for each season. For instance, when will you need to buy supplies for medical conditions, or over-the-counter medication during flu season?

"End-load" your spending

If you're unsure of how much you'll need to spend on medical expenses throughout the year, figure out ways to spend whatever's remaining in your FSA in the last months. The max your employer can contribute is $2,700 within a plan year. So, since you'll have access to the full year's allocation at the beginning of the plan year, you'll want to figure out how much you can reasonably spend through each month.

Remember: if you don't use it, you'll lose it. If it's deemed necessary, get Lasik, pick up new prescription sunglasses, or be prepared with necessary health-related supplies and equipment. The beauty of online shopping is you can figure out what your grand total is before you check out. Whereas if you shop in a brick-and-mortar drugstore, you can only best guess how much you'll be spending. It'll keep you within budget, and prevent you from going over your limit.

If your life is prone to change, take full advantage of the fact that the FSA funds provided by your current employer are made available from the start of the year. When life throws you a curveball, knowing what's eligible, assessing any changes in your financial needs and living situation, and creating a spending plan will ensure you spend all the money before the end of the year.

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From FSA basics to the most specific account details, in our weekly Asked and Answered column, our team gets to the bottom of your most-pressing flex spending questions. It appears every Wednesday, 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.