Contribute tax-free dollars to pay medical expenses

With rising healthcare costs, you may want to check into whether your employer offers a tax-beneficial flexible spending arrangement to cover certain medical expenses.

Health flexible spending arrangements (FSAs) provide employees with a way to use tax-free dollars to pay medical expenses not covered by health insurance or other health plans. Employees must let their employers know before the start of the plan year if they want to participate. Generally, most plan years start on Jan. 1, but you should check with your employer to make sure.

At the beginning of the plan year, you must designate how much you want to contribute. Your employer will then deduct the amount periodically from your paycheck. Once you’ve elected an amount to contribute, you cannot change it unless you have a change in your employment status or your family status.

An employee can elect to contribute up to a maximum amount of $2,550 in the 2016 plan year. Amounts contributed are not subject to federal income tax, Social Security or Medicare. If the plan allows, the employer may contribute to an employee’s FSA.

During the plan year, you may use FSA funds to pay qualified medical expenses not covered by your health insurance or health plan. Qualified medical expenses can be incurred by you, your spouse or any dependents that you claim on your tax return.

For FSA purposes, a qualified medical expense is:

  1. One that requires a prescription
  2. An over-the-counter drug for which you have a prescription
  3. Insulin

FSAs are generally “use it or lose it” plans, but there are two exceptions:

  1. Carryover option– An employee can carry over up to $500 of unused funds to the following plan year.
  2. Grace period option – An employee has two and a half months after the end of the plan year to incur eligible medical expenses.

Refer to your plan description to ascertain whether one of these exceptions applies to your FSA.