Does your employer offer a tax-saving flexible spending account (FSA) for health or dependent care expenses? If so, keep an eye on the calendar! If your employer lacks a grace period, any unspent funds in your account by year-end could be forfeited.
What you should keep in mind as year-end approaches:
Health Care Flexible Spending Accounts
In 2023 you’re allowed to make pre-tax contributions of up to $3,050 to a health FSA. However, this number will climb to $3,200 in 2024.
You can achieve tax savings through health FSA accounts by using pre-tax funds to cover medical expenses that might otherwise not be eligible for deductions.
As an example, if you don’t itemize deductions on your tax return, expenses won’t be deductible. If you do, however, the expenses must still exceed a set percentage of your adjusted gross income (AGI) to qualify for deduction.
It’s also worth noting that funds contributed to a health FSA aren’t subject to FICA taxes.
Qualifying expenditures
Your employer’s plan should include any documentation from a medical provider that you’ll need in order to be reimbursed for expenses, as well as a list of qualifying items.
Typically, health FSAs operate on a use-it-or-lose-it basis, meaning qualifying medical expenditures must be incurred by the last day of the plan’s effective date.
Many plans work off of a calendar year. In this case, the last day of the plan year would be December 31st.
However, some plans allow for an optional grace period. In most cases, this grace period won’t extend past the 15th day of the third month after the close of the plan year. (March 15 for a calendar year plan.)
To see how much money you have left to spend, review your year-to-date expenditures. Any funds you don’t use before the plan year ends will be forfeited. If you have a substantial amount of money left in your account, consider scheduling a qualifying elective medical procedure, visiting the dentist, or getting new glasses.
Dependent Care Flexible Savings Accounts
In addition to a health FSA, some employers allow employees to save pre-tax funds in dependent care FSAs. The maximum annual contribution for these accounts is $5,000. (For married couples filing separately, that gets split to $2,500 for each person.)
There funds may be used for:
- A dependent or spouse who is mentally or physically incapable of self-care and lives in the same home as you for at least half of the tax year
- A child under age 13 who qualifies as your dependent
Similar to health FSAs, dependent care FSAs adhere to a use-it-or-lose-it policy, though grace period exceptions may apply.
Questions? Smolin can help!
For additional details about your individual plan, reach out to your organization’s HR representative. For questions about tax implications and savings strategies, contact your accountant.