Acronym Overload: FSA & OTC Explained

Medical insurance terminology can be confusing. Then the healthcare industry adds in a bunch of acronyms and your confusion can turn to frustration. Consumers may choose to click past these letter- heavy headlines. Employees may put on blinders during open enrollment instead of investigating further. The unfortunate outcome is that individuals may ignore opportunities that would result in savings on healthcare expenses. A quick review of two common terms, FSA and OTC, and the recently updated CARES Act will help you understand your options. Do not leave money on the table at year-end.

FSA: Flexible Spending Account

What is it? An FSA is a healthcare savings account that allows the employee to deposit a portion of their paycheck tax-free into a savings account to pay for eligible healthcare expenses. A caveat of this offering is that all savings in an FSA must be used by the end of the plan year. (Some employers offer a grace period of up to 2.5 months.)

It is important to understand where the savings – that is, tax-free earnings – come into play. The example below shows the savings associated with paying for a qualified healthcare expense with, and without, an FSA.

Your salary: $50,000

Example expense: $50 copay for a doctor visit

Amount you need to earn to pay this expense:

• Without an FSA account: $61 (this amount is taxed at a rate of 22% per 2020 individual tax bracket) to get the $50 you need
• With an FSA account: $50 (remember, you put this into your FSA tax free!)

Cha-ching! That is $11 more in your pocket if you pay for this expense with your FSA account.

OTC: Over-the-Counter (medications)

What is it? Over-the-counter drugs are generally available for purchase without a prescription. This type of medication is available without the recommendation of a healthcare professional.

Since 2011, OTC drugs were deemed FSA ineligible without a prescription from your doctor. The CARES Act recently repealed the requirement of a prescription retroactively as of January 1, 2020. This means that you can use your FSA funds to purchase items like cold and flu products without requiring a doctor visit. The recent CARES Act update also made feminine care products FSA eligible.

Check with your employer to learn more about the FSA options available to you. Do you have money in your FSA account to use before year end? Shop online at the FSA Store for eligible purchases.

Originally featured in UBA’s October 2020 HR Elements Newsletter.