Estimating FSA Election Amounts

As the popularity of flexible spending accounts continues to rise, new and renewing participants may need help deciding how much to set aside in FSA contributions.

In this article, we provide a quick overview of why FSAs are so popular, how they work, and how to calculate the annual contribution amount.

Why are FSAs so popular?

Flexible Spending Accounts (FSAs) are one of the most popular employer-sponsored employee benefit accounts. Thanks to their pre-tax status, FSA account holders can save an average of 30 percent on eligible healthcare expenses.

In their latest market review, the Aite-Novarica Group estimates that there are 32.6 million active FSA accounts as of the 2022 plan year.

How do FSA accounts work?

Each year, employees elect whether or not to participate in their company’s FSA plan and choose how much to contribute. For 2022, the Internal Revenue Service (IRS) mandated a maximum annual contribution of $2,850. The 2023 limit will be announced soon.

The employee’s annual deduction is divided into equal installments, one for each pay period, and deducted from each payroll throughout the plan year before payroll taxes are taken out. This lowers the employee’s payroll taxes, which is how they save money by having and using an FSA account.

When participants incur an eligible expense, they can receive reimbursement from the plan administrator. There are two ways that can happen – automatically, by using the FSA account-linked debit card, or manually, by submitting a claim with receipts to the administrator after incurring a qualified out-of-pocket expense.

Through a regulation called the Uniform Coverage rule, the employee’s entire annual contribution is available for use starting on the first day of the plan year. However, installment contribution payments continue throughout the plan year regardless of when the annual contribution amount is spent.

At one time, all FSAs had a “use it or lose it” rule. Under this rule, employees forfeited any unspent balances in their accounts at the end of the plan year. Recent regulatory changes allow employers to offer an FSA Carryover or a Grace Period option instead of immediate forfeiture. Under the FSA Carryover option, up to $570 in leftover FSA funds can be rolled over to the following plan year. Under the Grace Period option, employers can offer up to 2.5 months of additional time after the end of the plan year to spend down the balance. Employers can offer one of these options, but not both.

How do I calculate my FSA contribution?

Whether your FSA plan offers Carryover, Grace Period, or “use it or lose it,” employees should carefully estimate the right amount to put into their FSA each year.

It’s impossible to know precisely how much an employee may need to cover eligible expenses over the next year. Instead, they should aim for a reasonable estimate.

Review the current year’s medical, dental, and vision care expenses and include those you expect to incur again over the next year.

Remember to include the employee’s share after insurance of deductibles, co-pays, and co-insurance for medical care, urgent care and ER visits, prescriptions, and any planned surgeries or other procedures. Also include:

  • Dental care expenses, including orthodontic work
  • Vision care expenses, including exams, eyeglasses, and contact lenses
  • Counseling and psychiatric care
  • Medical equipment and supplies
  • Physical therapy and other treatments

Employees who aren’t sure what their share of medical expenses might be after insurance has paid its share can review their employer’s health plan Summary Plan Document for additional information. This can be obtained from HR or the insurance carrier.

Employees who expect to undergo a costly procedure during the plan year for which they have no clear idea of the cost may want to contact their healthcare provider or insurance carrier for assistance calculating the likely out-of-pocket cost.

View a list of IRS-approved FSA-eligible expenses.

Another good idea is for employees to pre-plan some purchases just in case they have leftover funds near the end of the plan year. For example, the employee might order a pair of prescription sunglasses or stock up on over-the-counter medications and products that don’t expire quickly, such as bandages, diaper rash creams, antiseptic ointments, menstrual care items, and breastfeeding supplies.

To review, here’s how to calculate the annual FSA contribution:

  • Add up typical out-of-pocket expenses for medical, dental, and vision care over a typical plan year for the employee and their tax dependents.
  • If desired, include a cushion for unexpected medical expenses such as urgent care and ER visits.
  • Use the combined total of expected and potential out-of-pocket expenses as a guide when choosing the annual election amount.
  • Confirm how the plan treats unspent balances at the end of the year in order to plan for the best way to spend down anything that’s left over.

With the potential savings that FSA accounts provide employees, it’s not surprising that their popularity continues to grow. To maximize the benefit, however, employees must educate themselves on how FSAs work and how their plan treats leftover balances.