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Maximizing savings: How to effectively use healthcare and dependent care FSAs

By Sara Taylor | November 5, 2024

Flexible spending accounts empower employees to strategically allocate their funds to maximize savings and help ensure both their healthcare and dependent care financial needs are met.
Individual Marketplace
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Healthcare Flexible Spending Accounts (HCFSAs) are important because they provide a tax-advantaged way for employees to manage out-of-pocket medical expenses. By allowing pre-tax contributions and reimbursements, FSAs reduce taxable income, which can lead to significant savings. These accounts can be used for a wide range of healthcare costs, including copayments, prescriptions, and medical supplies, making it easier for individuals to budget for and afford necessary medical care. If an employee is also contributing to a Health Savings Account (HSA), the HCFSA is a limited purpose FSA, which generally covers dental and vision expenses only. Additionally, HCFSAs can help employees plan for unexpected healthcare expenses, providing financial peace of mind throughout the year. With HCFSAs, employees can use the funds immediately and don't have to wait for contributions during the year, a great feature for employees with a large, planned healthcare expense (such as orthodontia). These funds must be used during the plan year unless the client has a carryover or grace period feature.

Benefits of a HCFSA include:

  • Tax savings: Contributions are made pre-tax, reducing taxable income.
  • Wide range of eligible expenses: Covers medical, dental, and vision expenses for employees and their dependents.
  • Immediate access to funds: Full annual contribution amount is available at the start of the plan year.
  • Reduces out-of-pocket costs: Helps manage and reduce the cost of healthcare expenses.
  • Convenient payment options: Often comes with a debit card for easy access to funds.
  • No tax on withdrawals: Withdrawals for eligible expenses are tax-free.
  • Potential for carryover: Some plans allow employees to carry over a portion of unused funds to the next year.

On the other hand, Dependent Care Flexible Spending Accounts (DCFSAs) are intended to cover dependent care expenses, enabling employees to work or attend school. Eligible expenses include daycare, preschool, summer camps, and adult daycare for dependents who are unable to care for themselves. Non-eligible expenses include overnight camps, private school tuition, kindergarten tuition, and classes like dance or music. The contribution limit for 2024 is $5,000 per household, and contributions are also made pre-tax. DCFSA funds must be used within the plan year with no rollover option, and funds are available as they are contributed throughout the year.

Benefits of a DCFSA include:

  • Tax savings: Contributions are made pre-tax, reducing taxable income.
  • Covers various dependent care expenses: Can be used for daycare, preschool, summer camps and elder care.
  • Supports work-life balance: Helps manage the cost of care for dependents, allowing employees to work or attend school.
  • Reduces out-of-pocket costs: Helps manage and reduce the cost of dependent care services.
  • Convenient reimbursement: Submit claims for reimbursement of eligible expenses throughout the year.
  • Promotes financial planning: Encourages budgeting for dependent care expenses in advance.

Help your employees choose the approach to these accounts that best fits their needs and maximizes savings.

Key features to consider:

  • Purpose: HCFSAs cover medical expenses, while DCFSAs cover dependent care costs.
  • Contribution limits: DCFSAs have a contribution limit of $5,000 per household for 2025, while HCFSA has a contribution limit of $3,300.
  • Fund availability: HCFSA funds are available at the start of the plan year, while DCFSA funds are available as they are contributed.

A combined approach to managing a HCFSA and DCFSA can help the accounts work together to provide comprehensive financial support for employees managing both healthcare and dependent care expenses. By allowing pre-tax contributions, these accounts help reduce taxable income, thereby increasing take-home pay. Employees can use the HCFSA to cover medical, dental and vision expenses for themselves and their dependents, while the DCFSA can be used for daycare, preschool and elder care expenses. Coordinating these accounts enables employees to strategically allocate their funds to maximize savings and ensure that both their healthcare and dependent care needs are met efficiently. This dual approach not only offers financial relief but also promotes overall wellbeing by addressing multiple aspects of an employee’s life.

Author


Senior Director, Employee Spending Accounts

Sara has more than 31 years of experience bringing strategic direction and innovation to benefits outsourcing solutions. Her broad benefits experience includes health and welfare plan administration, spending account administration, healthcare advocacy, compliance solutions, and individual Medicare and exchanges. Sara is recognized for her deep subject matter expertise and ability to strategize and solution broadly across multiple services. Sara also has extensive experience leading strategic partnership relationships and merger and acquisition activities.

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