November is almost over and most of us, myself included, have already finished up during our Open enrollment benefit elections at the office but I think it would be a safe bet that some of us, again myself included, are new to benefits and don’t quite understand how everything works. Having just gone through my elections and having had multiple conversations with my wife and my HR department, I thought I would share what I have learned about the FSA or Flexible Spending Account at my work and why you should learn about and sign up if you haven’t already.
What is a Flexible Spending Account?
A Flexible Spending Account, better known as an FSA account is a program that creates a tax haven for money you set aside for medical expenses. These types of accounts have been around since the 1970’s. You have to elect to use this account through your employer during the benefit enrollment period and you have to re-elect to use the account each year. Money to fund this account is deducted from your pay before any taxes are taken, just like contributions to a 401k.
While in the past, an FSA was considered a reimbursement fund and you would have to eat costs up front, only to be sent a reimbursement after sending in documentation of qualified expenses, modern FSA accounts allow you to access your contribution using a special debit card that only allows qualified medical transactions to be processed. This alleviates much of the hassle that used to be associated FSAs.
What are the benefits of using an FSA account?
The main benefit is that the money used to contribute to an FSA account comes out of your paycheck pre-tax which means you get more bang for your buck toward medical expenses and you lower your gross income which has tax benefits.
This money is also completely available at the beginning of the year, in full, while your contributions start at the beginning of the year and you contribute from each paycheck for the whole year making your contributions fairly small depending on the amount you elect to contribute.
For example, if you elect to contribute $1200 to your FSA and come January you decide to get Lasik surgery. You can use that entire $1200 toward your surgery and it is all available January 1st. Contributions from your paycheck don’t change and for the entire year you would contribute $100 a month to your FSA essentially paying back the $1200 you spent on your surgery.
What’s the catch?
There are a couple of things to keep in mind when considering setting up a Flexible Spending Account. While these accounts save you money in taxes, the accounts are Use it or Lose it. If you don’t use up your entire FSA balance by the end of the year, it’s gone.
You can only use your FSA for qualified expenses. This used to include over-the-counter drugs as well, but starting in 2010 those no longer qualify so you will have to be more conservative when estimating your medical costs and deciding on a contribution amount.
A few more tips:
Due to a loophole in the FSA system, if you leave your job, whether you used all of your FSA funds before fully contributing that money or not, you are not required to pay back anything you spent from your FSA.
While your FSA is Use it or Lose it and the time period in which you can use the account is one calendar year, the IRS has changed the rules and allows employers to opt-in for an extension of that time frame. If they do this, you can claim reimbursements (or use your FSA debit card) up until March of the following calendar year, giving you a few more months to use up your existing funds.
You are limited on the amount you can contribute to an FSA. There are two different types of FSA accounts with their own limits. One type of account is for general medical expenses and the other account is more specific to dependent care and can be used for things such as day care or in-home childcare.
Overall a Flexible Spending Account can save you money but you should make sure to estimate your yearly medical expenses and elect to contribute only what you estimate spending. Throwing money away is stupid no matter how you do it.
Image by Laura4Smith
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