The Money Question: Should I Open a Flexible Spending Account?
Q. I rarely get sick so I don't have a flexible spending account through my employer. But a friend says I spend more on health care than I realize and FSAs lower the cost. What should I do?
A. I'm with your friend. Nowadays even being healthy can get expensive. Health insurance plans keep raising co-pays and deductibles, so you may be paying $25 or more out of pocket per checkup and $15 or more per prescription, plus a significant chunk (if not all) of your dental and vision care. An FSA will fund these expenses and save you money.
During your employer's enrollment period, open an FSA account and calculate how much money you'll contribute to it (the maximum is $2,500 a year) by estimating what you're likely to spend out of pocket on health-related expenses. (To get this sum, tally up your usual costs and add any extra expenditures that insurance won't cover, like a child's braces or LASIK surgery; don't worry about unpredictable medical issues.) The money, which your employer will deduct from your paycheck in equal amounts throughout the year, will not be subject to federal, state, or local income taxes.
Funds from this account can be used to pay for eligible medical expenses for you, your spouse and your dependents. For the average taxpayer in the 25 percent tax bracket, every $1,000 funneled through a health FSA could mean $250 saved in federal taxes, plus an average of about $60 more in state and local income taxes. Think of it as a savings of roughly 30 percent. That means you're effectively getting an automatic 30 percent discount on stuff you pay for via the FSA. If you're buying $300 prescription glasses, for example, you'd ordinarily need to earn nearly $400 (before taxes) to pay for them. With an FSA, your cost is $300, period.What Expenses are Eligible?
You can use your FSA for co-pays and prescriptions; medical procedures and surgeries; dental care, including orthodontics and dentures; hearing aids and contact lenses. FSA funds even cover expenses health insurance often won't, such as laser eye surgery, chiropractic, and acupuncture, and the cost of medically necessary home improvements, such as wheelchair ramps. Pharmacy supplies such as contact lens solution, denture-care products, and first-aid remedies are also FSA eligible, as are over-the-counter medications such as antacids, allergy and flu remedies, sleep aids, and rash ointments (though these require a doctor's prescription for reimbursement). Some items that do not qualify include hair-replacement products and procedures, medical marijuana, and Botox injections. For a complete list of what's eligible, check your plan's website.
The easiest way to use your FSA is to pay for the service or product with a special debit card provided by your plan. Or you can pay up front, submit your receipts to your plan and get reimbursed from the account. When you use your card, which works like a credit card, at a pharmacy or other store with a computerized inventory system, it can automatically identify eligible expenses and charge them to your account (but hang on to your receipts in case a questions arises).Spending Excess Funds
You do need to be cautious in funding your FSA because it's a "use it or lose it" account. What's not spent by the end of the year -- or, with many plans, by the following March 15 -- goes back into your employer's pocket (since the employer owns the plan). That's why I recommend, when you estimate your FSA contribution for next year, that you adjust the amount downward by 10 or 20 percent, just to be safe.
If you find yourself with a balance in your FSA account as the end of the year approaches, you need to be proactive about spending it. Get a pair of prescription sunglasses or that dental crown you've been putting off. You can also stock up on pricey OTC medicines if you have time to get a prescription. Or head to fsastore.com, where every item sold is FSA eligible.
You'll discover that using an FSA is a painless process -- one that, if you make the full $2,500 contribution, could put $750 or more in your pocket each year.
Angie Grainger, a certified public accountant, financial planner, and money coach in Santa Rosa, California, is the author of The Joneses Are Broke! Stop Trying to Keep Up With Them.
Originally published in Ladies' Home Journal, November 2012.