Flexible spending accounts (FSAs) are a great way to get tax savings. Your employer may give you an opportunity to sign up for an FSA during your annual benefits enrollment period. There are usually two different types of FSAs: Health Care and Dependent Care.

What is a Flexible Spending Account (FSA)?

Employers typically offer health care/dependent care flexible spending accounts as part of their benefits package. FSAs offer attractive tax savings benefits. Your payroll contributions fund the account using pre-tax dollars and account withdrawals are tax-free.

When you setup a flexible spending account, your salary is reduced to fund the account. Employee contributions are deducted from your pay throughout the year in a specified time interval (e.g. monthly, biweekly). Money in a flexible spending account may be withdrawn when you submit qualified expenses (e.g. daycare costs, medical care) following your employer’s specified FSA reimbursement process.

2022 IRS FSA Contribution Limits

The way an FSA account works is you specify the amount of money to fund your FSA account. The IRS sets limits on how much you can put into an FSA account. This limit may vary based on your tax filing status (married, single).

In 2022, the IRS set a Health Care FSA maximum limit of $2,850. Some employer plans may allow you to carryover up to $570 in unspent Health Care FSA money into the next year. Be sure to check with your employer for details on how your FSA plan works.

According to SHRM, in 2022 the limits are as follows for Dependent Care FSA (DC-FSA):

For 2022, the DC-FSA maximum, which is set by statute and is not subject to inflation-related adjustments, returns to $5,000 a year for single taxpayers and married couples filing jointly, or $2,500 for married people filing separately. Married couples have a combined $5,000 limit, even if each has access to a separate DC-FSA through his or her employer.

Maximum contributions to a DC-FSA may not exceed these earned income limits:

  • For single account holders, the earned income limit is their salary excluding contributions to their DC-FSA.
  • For married account holders, the earned income limit is the lesser of their salary excluding contributions to their DC-FSA or their spouse’s salary.

How to Submit FSA Expenses

To withdraw money from your FSA account you must follow your employer’s FSA reimbursement process and submit eligible expenses. Some examples of eligible health care expenses may include:

  • Prescriptions
  • Copays
  • Glasses/Contacts
  • Out-of-pocket medical expenses (x-rays, exams)

While a family may submit Dependent Care expenses as follows:

  • Children 12 and under daycare and summer camps
  • Adult daycare

When you have an FSA, it’s very important to keep your receipts and track any spending. You must follow your employer’s process to get fully reimbursed for your FSA expenses.

While some Health Care FSAs may give you an option to carryover up to $570 in any unspent money, Dependent Care FSAs do not because they are use it or lose it accounts. For example, if you put $3,000 into a Dependent Care FSA for the year. And you only spent $2,800 in qualified dependent care expenses for that time period. Then, you’d lose the remaining $200 in your DC-FSA.

The goal is to save money, not lose it. To avoid this scenario, carefully estimate how much to fund your FSAs.

Happy $aving!