Starting in 2013, you can set aside up to $2,500 per year into a medical Flexible Spending Account, or FSA. This limit applies to each plan, not each person on the plan. FSAs, also called Flexible Spending Arrangements, are funds that you can use to pay certain types of health care expenses. Not all employers offer FSAs as part of their benefits.
What's good about FSAs? They're tax-free. What's not so great? At the end of the year, what you don't use, you lose, unless your plan has a grace period. So before you fund your FSA, estimate how much of your expenses would qualify for FSA reimbursement. That way, you don't set aside more than you're likely to spend.
Not sure what you can use your FSA funds for? Think out-of-pocket health care expenses - medical, dental and vision charges not paid by your insurance. Some FSAs reimburse dependent care expenses. Check your FSA for details.
Here's what's different
Before 2013, there was no limit on how much you could put into your FSA. Now, the most you can contribute is $2,500 per year. Also, there's a new rule on medical spending accounts like FSAs. You can use FSA funds for over-the-counter medicine only if you have a prescription. Keep this in mind when planning your FSA contribution.What else is new about medical spending accounts
How it impacts you
If you don't have an FSA, this doesn't affect you. But if you have one, you can only set aside $2,500 or less. This puts a limit on your tax savings. But it also limits your loss if you end up not using all of your FSA funds.
Will the FSA contribution limit stay at $2,500 every year?
No. It will be adjusted yearly for inflation.
Does this new rule mean I need to have an FSA?
No. But if you have a lot of health care expenses that can qualify for reimbursement, it might be a good idea. Especially if you pay about the same each year.
Does the $2,500 limit apply to other types of spending accounts?
No. The limit only applies to FSAs. It doesn't affect your health reimbursement arrangement (HRA), health savings account (HSA) or medical savings account (MSA).
Will my FSA funds roll over to the next year?
No. You'll lose any FSA dollars left at the end of your plan year, so plan your contribution well. Some employers give you a grace period after the end of the year to use your FSA funds.