Flexible Spending Account (FSA) And Medicare Basics

Looking to save money with a Flexible Spending Account? Here’s how you can use your FSA with Medicare to reduce your taxes and help pay for eligible medical expenses.
Thomas Wright
Published on
June 11, 2024
Updated on
June 12, 2024

Flexible Spending Account (FSA) And Medicare Basics

In the world of healthcare finance, understanding the interplay between different benefits programs like Flexible Spending Accounts (FSA) and Medicare can be crucial for maximizing savings and coverage.

In an effort to help curb the rising cost of healthcare, savvy consumers employ the help of government loopholes and workarounds to help keep more money in their pockets. The funny thing is that these ‘loopholes’ aren’t necessarily a secret, it’s just people either aren’t familiar with them or choose not to take advantage of them. 

One of the more popular ways people choose to save money is with what’s known as a Flexible Spending Account (FSA), or Flexible Spending Arrangement. While we may know that these work well with traditional health insurance, the real question is how FSA and Medicare work together.

What Is A Flexible Spending Account?

A Flexible Spending Account (FSA) is an employer-sponsored benefit that allows employees to set aside pre-tax dollars to cover eligible medical expenses. These expenses can include copayments, deductibles, prescriptions, and certain over-the-counter medications. By contributing to an FSA, individuals can lower their taxable income and save money on healthcare costs. Some benefits of FSA include:

  • Any contributions by your employer will be excluded from your gross income.
  • Contributions are not subject to employment or federal income taxes.
  • You can withdraw funds for qualifying medical expenses tax free.
  • Ability to withdraw funds from your account for qualifying expenses before you even place funds in the account.

How a FSA Works

First things first, you’ll need to sign up for your Flexible Spending Arrangement through your employer, if it’s one of the benefits they offer. Understand that not all places of employment will offer an FSA. You would also need to make sure you sign up for your FSA during your company’s Open Enrollment Period.

FSA works by allowing you to set aside a portion of your pre-tax income into a designated account specifically for healthcare expenses. This amount is deducted from your paycheck before taxes are withheld, reducing your taxable income and potentially lowering your overall tax liability. You can then use the funds in your FSA to cover eligible out-of-pocket medical expenses such as copayments, deductibles, prescription medications, and certain medical supplies. This tax-advantaged structure effectively helps you save money on healthcare costs by using pre-tax dollars to pay for qualified expenses. It's important to note that FSAs operate on a "use it or lose it" basis, meaning any funds not used by the end of the plan year may be forfeited, although some plans offer a carryover or grace period option.


  • Employees voluntarily enroll in an FSA through their employer's benefits program.
  • Contributions are made through pre-tax payroll deductions, reducing taxable income.

Contribution Limits:

  • IRS sets annual contribution limits (check with employer for specifics).
  • Employers may also contribute, though it's not mandatory.

Tax Advantages:

  • Contributions are exempt from federal income tax, Social Security tax, and Medicare tax.
  • Employer contributions are excluded from the employee's gross income.

Eligible Expenses:

  • Funds can be used for qualified out-of-pocket medical expenses.
  • Examples include copayments, deductibles, prescription medications, and certain medical supplies.

Accessibility of Funds:

  • Funds can be accessed as soon as they are contributed, even if not yet deposited.
  • Typically, a debit card or reimbursement process is used to access funds.

Use It or Lose It:

  • Historically, unused funds at the end of the plan year were forfeited.
  • Some plans offer options like carryover or grace periods for unused funds.

Plan Specifics:

  • Plan details, including eligible expenses and rules, may vary.
  • It's essential to understand the specifics of your FSA plan to maximize benefits.

Can I Have An FSA And Medicare?

Yes, you can be enrolled in both your Medicare and FSA, so long as you’re employed. Having an FSA with Medicare can be advantageous as it allows individuals to pay for out-of-pocket healthcare expenses not covered by Medicare using pre-tax dollars. This means that expenses like copayments, deductibles, and prescription drugs can be paid for with money that has not been subject to income tax.

Benefits of Having an FSA with Medicare

  1. Tax Savings: One of the primary benefits of having Medicare and Flex Spending Accounts is the ability to save on taxes. Contributions made to an FSA are deducted from an individual's paycheck before taxes are withheld, reducing their taxable income.
  2. Covering Medicare Costs: While Medicare covers many healthcare expenses, there are still out-of-pocket costs that individuals may incur, such as copayments and deductibles. An FSA can help cover these expenses, ensuring that individuals have access to the care they need without breaking the bank.
  3. Flexibility: FSAs offer flexibility in how funds can be used. Eligible expenses range from medical services to prescription drugs to certain over-the-counter items, giving individuals the freedom to choose how to allocate their funds based on their specific healthcare needs.
  4. No Age Restrictions: Unlike some other healthcare savings accounts, such as Health Savings Accounts (HSAs), FSAs do not have age restrictions for participation. This makes FSAs accessible to individuals of all ages, including those enrolled in Medicare.

FSA and Medicare Rules

While having an FSA with Medicare can offer significant benefits, it's essential to understand the rules governing these accounts:

  • Coordination with Medicare: While FSAs can be used to cover Medicare copayments, deductibles, and certain other expenses, they cannot be used to pay Medicare premiums. Additionally, expenses reimbursed by Medicare cannot be reimbursed through an FSA.
  • Contribution Limits: The IRS sets annual contribution limits for FSAs. For 2024, the maximum contribution limit is $2,850 per individual. Employers may impose lower limits, so you must check with your employer for specific details.
  • Use It or Lose It: Historically, FSAs operated under a "use it or lose it" rule, meaning that any unused funds at the end of the plan year would be forfeited. However, the IRS now allows employers to offer either a carryover option or a grace period for spending unused FSA funds. Employers can choose to allow participants to carry over up to $570 of unused funds to the following plan year or offer a grace period of up to two and a half months to spend unused funds.

FSA Eligible Expenses

Funds from your FSA can’t be used on just anything. First, it needs to be an eligible expense, which will be outlined in your FSA agreement and may vary depending on the type of account you choose to go with. There are currently three main FSA types that people choose to go with, and they include:

  • Healthcare FSA
  • Limited Expense Healthcare FSA
  • Dependent Care FSA

Again, depending on which account you choose to go with, your eligible expenses may vary. The following list is a good place to start and includes most eligible expenses, but still may not be complete. Just because you request reimbursement from your FSA doesn’t mean your request will be honored. For some expenses, you may need to provide additional information, such as an Explanation of Benefits or a Letter of Medical Necessity, to be approved.

Maximizing Your Healthcare Savings and Coverage

To maximize your healthcare savings and coverage with  Medicare and FSA accounts, consider the following tips:

  • Contribute Wisely: Estimate your expected healthcare expenses for the year and contribute accordingly to your FSA. Be mindful of contribution limits and any employer restrictions.
  • Keep Track of Expenses: Maintain detailed records of your healthcare expenses throughout the year, including receipts and explanations of benefits (EOBs). This will make it easier to substantiate FSA claims and ensure that you're maximizing your reimbursement.
  • Understand Coverage Gaps: Familiarize yourself with what Medicare does and does not cover to identify potential gaps in coverage that could be addressed with FSA funds.
  • Plan Ahead: Take advantage of FSA funds early in the plan year to cover anticipated expenses. However, be mindful of the "use it or lose it" rule or any carryover or grace period options offered by your employer.

In conclusion, Medicare and flexible spending accounts can be valuable tools for maximizing healthcare savings and coverage. By understanding the rules and benefits associated with both programs, individuals can make informed decisions to ensure that their healthcare needs are met while minimizing out-of-pocket expenses. Whether covering copayments, deductibles, or other eligible expenses, an FSA can provide financial peace of mind in conjunction with Medicare coverage. Start comparing plans today or speak with a licensed insurance agent. If you have questions, call 855-277-2380.

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