Flexible Spending Accounts: How to Save Money with Your Pre-Tax Dollars
Living with chronic health issues like Rheumatoid Arthritis is expensive. My article last month focused on how to save money on your prescriptions. This month, with so many people getting ready to enroll in benefits for the next year, I wanted to talk about a great way to save money on EVERY aspect of your health care. It's called an FSA, which stands for Flexible Spending Account. Many businesses offer this benefit to their employees but as many as 46% of employees pass it up. They may not understand exactly how it works or how it can save them money. Once you understand how much an FSA account can save you, you'll be wondering why you haven't used it all along!
What is a Flexible Spending Account (FSA)?
An FSA is an employer offered opportunity to set aside money from your paycheck into a special savings account to use for medical expenses throughout the year. The money is deducted from your paycheck BEFORE income taxes are calculated on your pay. This can reduce your total income tax per year because you're paying for all your medical related expenses with pre-tax dollars.
How does it work?
An FSA is a special "spending account" that lasts for one calendar year. You must spend what you put into it by the end of the year you enroll in it. During the previous year's open enrollment, you decide how much money you want to put aside for the next full year (the limit will be $2,500 in 2013). Let's use $1,200 as an example for the total amount we want to put into our FSA. With each paycheck during the year you elect to use an FSA, an equal portion of your total amount is deducted from your paycheck before taxes. If we use the $1,200 example and you are paid twice a month, $50 comes out of each paycheck (x24 paychecks = $1,200).
As for spending that money, there are usually two options. First, many companies now offer a debit card for ease of use. Some companies still require you to submit your receipts for reimbursement. Regardless of which option your FSA uses, your TOTAL yearly amount that you decide to put into your FSA is available IMMEDIATELY at the first of the year, even though it will take you all year to pay into it. That's right...every dime of it can be used in the very first month if needed without any penalty. So if you have surgery scheduled in January and know you're going to have a $500 deductible for it plus other costs, your FSA account can pay for it all and you still only see that same deduction from your paycheck all year long!
What can I spend my money on?
You may use your FSA money for any "qualifying expense" that is listed by the IRS. Qualifying expenses include just about everything related to your medical care like insurance premiums, co-pays, co-insurance, doctor visits, prescription drugs, durable medical equipment (i.e., wheelchairs, prosthetics, etc), eyeglasses, dental and more. You may also be able to use your FSA for day care for children or dependent adults. Be sure to check the official guide for using your FSA on the IRS website before you spend to avoid any penalties. And always remember to keep your receipts for everything you spend your FSA money on, even if you use an FSA debit card.
How can it save me money?
FSA monies are deducted from your paycheck before taxes. This can add up to huge saving for you. For example, the average household tax bracket is about 25%. If you spend $500 on health related costs after you've paid taxes on it, then you had to earn approximately $675 to have that $500 in hand! But if you put that money directly into an FSA, there is no tax money taken out of it so you only have to earn $500 to spend $500. You essentially save 25% on all your out of pocket health care expenses that you pay for with your FSA account!
What are the limitations?
The only limitation to an FSA is that you have to use whatever money you put aside by the end of the calendar year in which you enrolled. So, it's really important to take a realistic look at all your upcoming yearly health care costs before you decide how much to put aside each year. Sometimes companies will offer an extension to use remaining funds through the 15th of February, but not always, so best to check with your company for details. Plan carefully. Once you enroll, you can't change your savings amount unless you have a qualifying event like getting married, divorced or having a child.
What happens if I leave my company?
If you leave your company, whether through lay-offs, moving to disability or getting fired, and have already spent more money than has been deducted from your paycheck, the money is yours to keep. If you haven't spent all your money, the FSA is usually covered by COBRA laws (Consolidated Omnibus Budget Reconciliation Act) and you can decide if you want to keep the account open and continue paying into it after you have left the company.
Setting up a Flexible Spending Account can be an easy way to save extra money on annual health care expenses for you and your family. With open enrollment dates coming up for the new year, now is the time to take advantage of this cost saver. Check with your employer’s human resources department to find out if your company offers it as part of their benefit package.
For more information:
- IRS Pub. 969, Flexible Spending Accounts & Other Tax Free Medical Savings Options
- IRS Pub. 502 - Medical and Dental Expenses
- IRS Issues Guidance for 2013 Flexible Spending Accounts
Carrie Beth Brown is the author of the blog Dancing in the Rain.