Making the Most of Your Flexible Spending Account

This is a guest post from Tim Chen, founder and CEO of NerdWallet.com, a website that helps consumers to compare credit card offers.  Tim also educates consumers about credit cards and debt management at the Forbes Moneybuilder Blog, the Huffington Post, and USNews.

With the cost of healthcare always on the rise, getting the most bang for your medical-spending buck is a growing priority for consumers. One step to that end – though not the only one – is the establishment and effective usage of what’s known as a flex spending account, or ‘FSA’ for short.

A flexible spending account is a pool of money that is meant to be spent on healthcare expenses, which are not normally covered by insurance. They are facilitated by a sponsoring employer, contributed to by the employee, and most importantly, deducted from income that’s normally taxed by the IRS. You just get a basic charge card to be used for medical purposes, and by depositing pre-tax dollars into the pool, the owner of the FSA will in theory save a little money when it’s time to give Uncle Sam his share of your income.

Drawbacks

As is the case with most government-related concessions though, the upside comes with a downside. Take, for example, what’s perceived as a flex spending account’s biggest drawback – the “use it or lose it” clause. While there’s no minimum annual contribution one must make to an FSA, any unspent money in the account at the end of the plan year is simply lost; the employer gets it back and applies it toward future management costs of the plan.

As for contribution limits, the maximum annual contribution will gradually shrink to $2500 per year, per President Obama’s 2010 healthcare reform – assuming the new law isn’t overturned in the future.  (From Kris- this infuriates me as I planned on putting side enough money to cover braces for you youngest son in 2010.)

Advantages

All that being said, one of the biggest ways an FSA can help where most health insurance plans can’t is in the wide range of ways this fund’s money can be spent. For most plans, services such as Lasik surgery, dental braces, and even insurance deductibles may be allowable expenses.

Another one of the key perks of a flexible spending account is the inclusion of some dependents’ healthcare expenses; the dependent isn’t even required to be covered by the employee’s insurance to be eligible. Just keep in mind that permitted expenditures and dependent coverage can vary from one plan to the next, so check with your employer for details.

Also, while most plans follow the calendar year, some employers may offer plans that start and stop the spending clock well after December 31st, such as April 15th.  This means that you actually have closer to 16 months before the “use it or lose it” clause kicks in, rather than 12. Just keep in mind that no matter when the deadline is, medical services and purchases need to be performed before then, and any reimbursement requests must also be made within a certain timeframe of their ocurrence in order to be fully compensated.

You can almost think of it as a rewards credit card that can only be used for medical purposes, and your reward is the 25% or so that you save on income taxes.  Just don’t get stuck holding a balance at the end of the year, or it disappears.

Tips for getting started

Here’s the IRS overview of FSA plans, which serves as a basic guideline for employers as well as employees.

Also, here are a few tips for getting the most out of an FSA:

• Don’t contribute more than you reasonably expect to spend on healthcare needs. The tax advantages are nice, but because you could lose what you put in, it’s still better to under-contribute than over-contribute. Being penny-wise is never worth being pound-foolish.
• Do contribute aggressively when you are certain of an expensive upcoming event like Lasik surgery or braces. The best way to do this is to schedule an initial check-up at the end of the year, and ask your doctor for a procedure estimate, which you can then use to determine how much to contribute for the coming year.
• When in doubt about whether or not a treatment or procedure is covered, ask first. Don’t be afraid to get creative, the plans are often surprisingly liberal.
• Save all receipts, and submit them to your employer by the required reimbursement deadlines.  It’s common sense advice, but the simplest issues are always the ones that derail you.
• Keep tabs on one year’s total healthcare spending to use as a basis for determining the following year’s contribution, ignoring any one-off expenses like the cosmetic procedures mentioned above.

From Kris- Be careful of how much you contribute to your FSA if you are at risk for being laid off.  If you leave your job, willingly or not, the money you contributed to your FSA will be forfeited when you leave the company.  On the flip side, you are able to spend the total amount you ‘pledged’ for the year on January 1st.  So, if you leave your job in June and already spent all your FSA money for the year, you get off lucky and do not have to pay the uncontributed balance. (That is how it stands today.  Not sure what happens with Obamacare…)

Do you contribute to an FSA?  Has it worked out well for you?  I always seem to underestimate our needs each year, especially for 2010…

Tagged as: flexible spending account, fsa, medical expenses, medical reimbursement, obamacare