Flexible Spending Accounts (FSAs) offer working Americans a way to put aside pre-tax income for healthcare costs. If you are nearing Medicare eligibility or have already enrolled, you may have questions about how these two benefits work together.
How Does a Flexible Spending Account Work?
An FSA is a benefit provided through your employer that lets you direct pre-tax dollars from your paycheck toward qualified medical expenses. Important characteristics include:
- Tax advantages: Your contributions lower your taxable income
- Use-it-or-lose-it rule: FSA balances generally must be spent within the plan year (though some employers allow a grace period or limited rollover)
- Qualified expenses: Office visits, prescriptions, dental care, vision services, and a wide range of over-the-counter health products
Is It Possible to Have Both an FSA and Medicare?
The short answer: it hinges on whether you are still employed.
Still Employed
If you are 65 or older, covered by Medicare, and still working, you may be eligible to keep making contributions to an employer-sponsored health FSA. Your FSA funds can help cover Medicare-related out-of-pocket expenses like:
- Part B premiums (in certain situations)
- Copays and coinsurance
- Deductibles
- Dental, vision, and hearing costs that Medicare does not cover
- Prescription drug copays
No Longer Working
After you leave your employer, contributing to an FSA is no longer an option. That said, you usually have a limited window to spend any remaining balance on qualified expenses incurred before the plan year or grace period concludes.
FSA vs. HSA: A Key Difference
People frequently mix up FSAs and Health Savings Accounts (HSAs). There is a crucial distinction for Medicare beneficiaries:
- FSA: You can spend FSA funds alongside Medicare, and there are no contribution restrictions while you are employed
- HSA: Once you enroll in any part of Medicare, you are no longer allowed to contribute to an HSA. See our HSA and Medicare guide for details. You may still withdraw existing HSA funds tax-free for qualified medical expenses, including Medicare premiums and cost-sharing
Preparing for Your Medicare Transition
If you are approaching 65 and currently use an FSA, here are some steps to consider:
- Be strategic about enrollment timing. If you intend to keep working past 65, you may be able to postpone Medicare and continue funding your FSA (and HSA if relevant).
- Use up your FSA balance. Before departing your employer, spend your FSA funds on eligible expenses so you do not forfeit money.
- Review your employer's policies. Grace periods and carryover rules differ from one employer to the next.
- Seek advice from a benefits professional. An advisor can help you align your workplace benefits with Medicare to get the most value.
Main Points to Remember
- FSAs can work alongside Medicare for beneficiaries who are still employed
- FSA access ends when you leave your employer
- HSA contributions are prohibited once you sign up for Medicare
- Plan ahead to avoid losing FSA funds or encountering surprise expenses
- If you are leaving employer coverage, check whether you have special enrollment period rights to join a Part D or Medicare Advantage plan without penalty