Flexible Spending Account (FSA) And Medicare Basics

By: Thomas Wright
Published: Thursday, January 31 2019
Last Updated: 4 years ago

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’s and Medicare work together.

What Is A Flexible Spending Account?

A Flexible Spending Account, often abbreviated to FSA, is a designated healthcare account in which you can contribute pre-taxed funds from your paycheck, and use those funds to cover qualifying out-of-pocket medical expenses. Setting up your FSA is completely voluntary, and needs to be done through your employer, who may make their own contributions to your FSA, although it’s not a requirement. Benefits 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 fund 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 It 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.

Once enrolled, you will need to specify how much money you would like to contribute to your account, and those funds will then be deducted from your paycheck each payday, and put towards your FSA. It’s important to try and determine how much money you expect to use, because if you have any unused FSA funds at the end of the year, your employer will get to keep it. Although, they do have a grace period and the ability to roll over $500 to the following year.

Once you begin making contributions, or even before, you can then use your account funds to pay for eligible medical expenses. For example, things like deductibles, copayments, and filling your prescriptions. Withdrawing your money varies by employer, but you will either be provided a debit card you can use or wait for reimbursement after submitting paperwork.

Can You Be Enrolled In An FSA And Medicare?

Yes, you can be enrolled in both your FSA and Medicare, so long as you’re employed. Being enrolled in Medicare doesn’t have any effect on your FSA eligibility like it does for other savings programs, like Health Savings Accounts (HSAs). Generally, Flexible Spending Accounts have fewer eligibility requirements since they are offered solely through your place of employment.

Furthermore, since FSAs are offered by employers, they can be used in conjunction with other health plans. This means you can use FSA and Medicare to get the most out of your savings. This also gives employers greater flexibility to offer a wider range of benefits when it comes to creating their plan. You can use your FSA and Medicare to save money on prescription drugs, medical expenses, treatment, and more.

Will You Be Subject To Any Penalties?

No, you won’t be subject to any penalties if you decide to continue contributing to your FSA while on Medicare. As mentioned above, Flexible Spending Accounts are one of the few ways you can save money on eligible medical expenses without having to worry about repercussions. However, there is still a chance you lose out on your money if you don’t use it within the year.

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 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 that 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.

Can It Be Used to Pay Your Premiums?

No, you can’t use your Flexible Spending Account to pay for your Medicare premiums, as it does not fall under one of the eligible expenses. FSAs are reserved for use on eligible, out-of-pocket expenses that Medicare may not cover in full, or at all. If your employer offers benefits through a major insurance provider, then you can use your FSA to make up the remainder of the costs.