ARCHIVED BLOG, PLEASE NOTE: The information below was posted prior to any affiliation with LPL Financial and is posted here for historical purposes only
If you are actively employed at the University of Michigan, there is a high probability you have an opportunity to use a Flexible Spending Account (FSA). While many people have heard colleagues mention these plans, they have never learned why or how to use them. I hope you find this post helpful in answering these fundamental questions, as well as a couple more you may not have thought of yet.
Why sign up?
The primary reason for utilizing an FSA is tax efficiency. Every dollar saved into your FSA results in a direct reduction of your taxable income. Therefore, you can save both income taxes and payroll (FICA) taxes.
How to sign up?
Your FSA savings must be elected during an enrollment period (such as open enrollment in October). There are two types of FSAs: Health Care FSAs and Dependent Care FSAs.
- Health Care FSAs can be used for related expenses such as deductibles, prescriptions, eye exams, glasses, copays, preventative care, etc. You can view the full list of eligible and ineligible expenses here: UofM Health Care FSA
- Dependent Care FSAs can be used for eligible dependent day care or elder care expenses. Many parents will utilize this plan to cover their young children's daycare expenses. Please see the UofM benefits website for more information on qualifying dependents and expenses: UofM Dependent Care FSA
How much to save?
One caveat to FSAs is that it is considered “use it or lose it.” You only have a year to use the money you put into the account, so you want to ensure you opt for an appropriate amount during your enrollment. I recommend deferring an amount you know that you will utilize each year. Here are some questions to ask yourself:
- How much do I spend on regular monthly prescriptions?
- How much do I spend on glasses and contacts each year?
- How much do I spend yearly on regular medical testing and/or preventative care?
It is also important to note the IRS limit is subject to change annually. For 2023, the Dependent Care FSA limit is $5,000, and the Health Care FSA limit is $2,850.
- Important note #1: If your family has gross earnings of $130,000 or more, your Dependent Care FSA limit is $3,600/year.
- Important note #2: If you and your spouse are both eligible for a Health Care FSA, you can each defer $2,850. However, if you and your spouse are both eligible for a Dependent Care FSA, you can only defer a combined $5,000/year.
- Important note #3: If you are filing your taxes Married Filing Separately, the annual limit for the Dependent Care FSA is $2,500 per spouse.
How to use the money?
When you enroll in the UofM Health Care FSA, you will receive a PayFlex Card. This can be utilized at the point of transaction to cover your costs. You may need to provide itemized receipts to PayFlex post transaction for verifications. Alternatively, you can pay for eligible expenses out of pocket and request reimbursement later through an online claim, a paper form, or the PayFlex Mobile app.
There is no card available for the Dependent Care FSA. You must cover all costs out of pocket and request reimbursement later through an online claim or paper form (along with an itemized list of the qualified expenses).
When should the money be used?
As mentioned earlier, FSA money should be used in the calendar year it is saved. For example, if you sign up to save $2,000 into your FSA in 2023, you will want to use the total amount between January 1st and December 31st. Fortunately, there is a grace period for using the money until March 15th of the following year and an extended deadline until May 31st to submit the claims.
What to watch for if this is your first year using a Dependent Care FSA?
Since the Dependent Care FSA is reimbursement only, please review your monthly cash flow before signing up for the plan. You will be saving to your FSA through payroll AND paying for dependent care costs out of pocket simultaneously. You will be eligible for reimbursement later, but it can sometimes be challenging to manage monthly cash flow when you first start using the plan.
Flexible Spending Accounts are an underutilized benefit through the University of Michigan. While they may not be a good fit for everyone, it is important to know the potential benefits of using them for your personal financial situation. Good luck to all of you for Open Enrollment 2023!
We are not affiliated, associated, authorized, endorsed by, or in any way officially connected with the University of Michigan, or any of its subsidiaries or its affiliates. Please consult with a qualified tax professional before making any tax-related decisions.