Do you qualify to have a Flexible Spending Account (FSA, also called a Flexible Spending Arrangement)? If so, do you know the FSA contribution limits for the current year?
Using an FSA for qualifying expenses can be one way to decrease your taxable income and put more money in your pocket.
More money in your pocket means you can pay off debt, save money and have a better chance at reaching financial freedom.
In this article, we’ll share detailed information about FSA contribution limits for the current year and what you need to know to determine if an FSA might be a good financial tool for you.
In This Article
What are the 2021 FSA Contribution Limits?
As you prepare your taxes, you may be thinking about ways to save on them next year. An FSA is a tax-advantaged spending account to be used for qualifying health expenses.
You contribute money to an FSA from your pre-tax income, thereby reducing your tax burden.
The IRS has kept FSA contribution limits at the same rate as last year. This means that you can contribute up to $2,750 to an FSA in 2021.
This dollar amount limit applies to both types of FSAs allowed by the U.S. government. It includes General Purpose FSAs and Limited Purpose FSAs.
Next, we’ll talk about the difference between the two types of FSAs.
Types of FSAs
Each type of FSA has different qualifications for users and different types of expenses that can be covered.
It’s important to understand these differences so you can know which type of account might work for you.
Here are some details regarding each of the two types of Flexible Spending Accounts:
What is a General Purpose FSA?
A General Purpose FSA is a tax-advantaged spending account you can use to cover many types of medical expenses. The list of eligible expenses is determined by the IRS.
A General Purpose FSA functions as an alternative to a Health Savings Account (HSA). Like an FSA, an HSA is a way to save pre-tax income that you then use on medical expenses.
But to have an HSA, you must also have a high-deductible health plan (HDHP). There’s no such requirement for a General Purpose FSA.
General Purpose FSA funds can be used to cover expenses such as insurance deductibles, prescription costs, and copays.
There are other types of expenses that can be covered with FSA funds as well. We’ll talk about those in a few minutes.
Note that if you don’t use all of your General Purpose FSA contributions on qualified expenses, you may lose some or all of that money.
However, if your FSA has a rollover feature, up to $550 of FSA funds can be rolled over to the next year’s General Purpose FSA contributions.
This $550 rollover allowance does not affect the following year’s contribution max, either.
In other words, even if you rolled over $550 from your General Purpose FSA in 2020 to your 2021 balance, you can still contribute $2,750 in 2021.
Because you can lose FSA monies, it’s important to plan carefully as you decide how much money you’ll spend on qualified FSA expenses.
To summarize, a General Purpose FSA works like an alternative to an HSA. There are some differences in qualification requirements for the two plans. We’ll talk about those later.
What is a Limited Purpose FSA?
A Limited Purpose FSA works a bit differently from a General Purpose FSA. Whereas a General Purpose FSA is essentially an alternative to an HSA, a Limited Purpose FSA works in tandem with an HSA.
As such, Limited Purpose FSAs can only be used for certain types of qualifying dental, orthodontia and vision expenses. It can be helpful if you don’t have dental insurance.
We’ll share more in detail later as to what types of dental, orthodontia and vision expenses can be covered with a Limited Purpose FSA.
As with the General Purpose FSA, the Limited Purpose FSA has a $550 carryover balance each year.
You can carry over $550 of the previous year’s Limited Purpose FSA funds to the new year.
Even if you carry over funds, however, you can still contribute up to the maximum contribution limit for the year.
And as with the General Purpose FSA, you will lose Limited Purpose FSA monies you don’t use, aside from the $550 rollover monies.
Note that the rollover amounts can change when the FSA contribution limits change. Keep this in mind from year to year.
Who Can Qualify for an FSA?
As I mentioned above, a General Purpose FSA is meant to be an alternative for you if you don’t qualify for a Health Savings Account.
It’s true that both HSAs and FSAs allow people with health insurance to set aside money for designated health expenses.
However, not everyone qualifies for an HSA. If you don’t have an High Deductible Health Plan, you are not eligible to open an HSA.
In addition, you can’t open an HSA if you have other non-eligible insurance coverage. There are other guidelines that can disqualify you from opening an HSA, too.
For instance, you can’t open an HSA if you are on Medicare. As you can see, HSAs serve a limited market.
FSAs Can Serve a Broader Market
This is where the General Purpose and Limited Purpose FSAs come in. They can often serve a broader market.
Whereas HSA eligibility is only for those who have an HDHP, to qualify for an FSA you only have to work for an employer that offers FSA accounts.
You can be covered by several insurance plans — or none. Note that you can’t open an FSA if you’re self-employed or if your employer doesn’t offer FSAs.
To summarize, a General Purpose FSA is meant to be an alternative to an HSA. Subsequently, you can’t have an HSA and a General Purpose FSA at the same time, even if you stay within FSA contribution limits.
You must choose one or the other.
Alternatively, a Limited Purpose FSA is meant to work together with an HSA. If you have an HSA and your employer offers FSAs, you likely qualify for a Limited Purpose FSA.
Visit the IRS website and search for information on FSAs to find out additional criteria for qualifying for one. Next, we’ll talk in more detail about what types of expenses you can use FSA funds for.
What Types of Expenses Can FSAs be Used For?
Knowing what FSA funds can be used for can help you better plan for how close to FSA contribution limits you should plan to contribute.
FSA monies can be used to pay for a wide variety of expenses (see below). Besides insurance copays and deductibles, health-related products are also eligible.
General Purpose FSA Expenses
According to the IRS, FSA eligible expenses must be used to treat or prevent physical or mental illness.
You can’t use the money to buy items that are merely beneficial to health, such as a vacation or vitamins.
The list of designated expenses you can use your General Purpose FSA monies on is long. Here are just some of the items you can use General Purpose FSAs for:
- Insurance copays and deductibles
- Prescription medicines
- Some addiction treatment programs
- Chiropractic care
- Some fertility treatments
- Hearing aids
- Bandages and first aid supplies
- Breastfeeding supplies
- Allergy alert and medical alert bracelets
This list may change with IRS modifications to the rules, but it’s current as of this writing.
To make it easier to shop for these items, you may want to visit an online FSA product retailer such as FSAstore.
Merchants such as FSAstore let you shop online for FSA-eligible items such as bandages and other personal health items.
Limited Purpose FSA Expenses
Here is a list of some of the qualifying designated expenses for a Limited Purpose FSA. As I talked about earlier, Limited Purpose FSAs work in tandem with HSAs.
They can be used for dental, orthodontia and vision expenses such as:
- Insurance copays and deductibles for dental, orthodontia and vision care
- Glasses, contacts and coordinating care items for glasses and contacts
- Eye surgery to correct a problem, such as laser eye surgery or cataract surgery
- Dental braces
- Treatment of dental issues such as cavity fillings, root canals or caps
- Saline solution and enzyme solution for contact lens care
These are just some of the examples of qualifying expenses for Limited Purpose FSAs. Check with the IRS for a full list of qualifying expenses.
As you can see, there is a lot to know regarding qualifying for and using Flexible Spending Accounts and about FSA contribution limits.
Whether you qualify for and use a General Purpose FSA or a Limited FSA, there are benefits to opening these types of tax-advantaged accounts.
Check with a trusted tax professional near you to find out if an FSA can benefit you.
Depending on your individual employment and tax situation, opening and using an FSA for qualified expenses could save you money on your taxes.
Have you used or thought about using an FSA to cover medical expenses? We’d love to hear about your experiences. Feel free to share them or your thoughts in the comments section below.