Over the past few months my employers have been scrambling to try and manage the company’s health care costs in light of pending increases in premiums both for the company, and for employees.
With all the uncertainty with pending health care legislation, increased taxes and other concerns the company has put off making any huge decisions on health care this year, and we’re choosing to continue our coverage, but with a large increase in premiums. Next year the company may be moving to a Health Savings Account (HSA) system to help manage costs. This will mean higher deductibles, which for some people will mean paying more out of pocket. We’ll see how it works out.
One thing we decided to do this year, that we probably should have done in past years, was to sign up for my company’s health care flexible spending account or FSA. this should allow us to save a bit of money on our taxes this coming year. FSAs aren’t for everyone, for reasons that we’ll go into below.
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What Is A Flexible Spending Account Or FSA?
FSAs are not offered by all employers, and if you’re self employed you aren’t able to participate. Normally how it works is your company will have an open enrollment period for the FSA when you can sign up for the company’s plan. At that time you have to elect an amount that you want your employer to deduct from your paycheck that will be contributed to the FSA. That amount is taken out of your pay before taxes, and can then be spent on eligible health care costs. Using pre-tax money to pay for medical and health care spending allows you to lower your taxable income. So basically FSAs are a good way to lower your taxes, especially if you’re anticipating a lot of medical costs in a year as we are.
Normally you can’t change your amount you’ve elected to deduct from your pay during the year unless certain life events have happened and there has been a change in your employment or family status.
Contributions To Your FSA
When signing up for your FSA account you have to designate how much you want to contribute for that year. You’ll want to estimate how much money you think you’ll be paying out of pocket for the coming year’s health care expenses, and you then sign up for the year’s FSA account using that amount. Your employer will then set it up so that the amount is deducted from your paycheck before taxes, and it will effectively lower your taxable income.
While the government hasn’t set a limit on the amount you or your employer can contribute to the accounts, each FSA plan will usually have a maximum dollar amount or maximum percentage that you can contribute to the account.
Our plan has a maximum of $5000 that you can contribute, and at this time we’re contributing $3000. We are expecting our first child this year, and we expect to have substantial medical bills because of that, so using a FSA this year is a good choice for us. With the life change event in July when the baby is born we can elect to increase our contributions if needed. If we expect to use all $5000 of the maximum allowed, we can add the extra contributions to our plan at that time.
FSA Contributions Must Be Used Or Be Lost
In most cases FSA funds that are not used during the year are subject to forfeit, so it’s important when you’re estimating your health care costs, to be as close as possible to the actual costs. If you’re way off you may find yourself trying to figure out as many eligible health care expenses at the end of the year as you can so you don’t have to forfeit your remaining money. Any forfeited funds are returned to the company and are used to cover other plan users that may have left their job during the year.
FSA Funds Can Be Used At Any Time – The FSA Loophole
One thing that is nice about contributing to a FSA is the fact that you can use your elected funds at any time. For example, if my family had $3000 worth of health care expenses in the next month, we would be able to submit those expenses to be reimbursed even this early in the year. Even though we’ve only made one small payment on our FSA account (nowhere near the $3000 we’re planning to contribute), we can still spend all $3000 up front. This also has been referred to as the FSA loophole because if you end up leaving a job only part of the way into the year, you no longer have to make contributions to your FSA, even though you’ve used all of your money for the year. The negative balance in your account is balanced out by funds not used by other plan members who have forfeited their funds at the end of the year.
How You Get Reimbursed For Health Care Expenses
When you sign up for a FSA you will often have to pay for all of your health care expenses out of pocket, and then submit a claim for reimbursement. There are a few ways that you can get reimbursed:
- Check in the mail: Often you will have to submit a form with attached documentation to prove your health care expenses. Reimbursement will often take a couple of weeks at which time you’ll receive a check in the mail.
- Direct Deposit: Same as above, except you elect to receive the funds via a direct depost it so it is a bit quicker.
- FSA debit card: Some plans now offer a debit card for your FSA plan. You just use the card on eligible expenses and the amount is deducted from your account.
At my work we have only have the first two options available, so we’ll be electing to have the funds direct deposited into our checking account.
Conclusion
If you know that your family is going to have substantial medical costs during they year, using an employer sponsored FSA plan can be a great idea. You can end up saving hundreds of dollars on your taxes. Our family knows in advance this year that we’ll be having thousands of dollars in bills due to the birth of our first child, and for us using the FSA is a great deal. Yes it’s a pain keeping track of all the costs, but the hundreds of dollars in savings we’ll enjoy are worth it.
Does your family have an FSA plan? Were you able to elect the correct amount in past years, 0r did you find yourself scrambling to find eligible expenses at the end of the year? Tell us your FSA experience, or ask us questions in the comments!
Very nice FSA overview. The “use it or lose it” provision can hurt, but with good planning and Gather’s list you link to, a visit to the eye doctor or the OTC drugstore items can use it up.
We are good for nearly $4000/yr between doctors my plan doesn’t cover (Chiropractic) co-pays, etc. A nice chunk to save from taxable income with very little effort overall.
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Loophole is great. Hopefully i don’t HAVE to use it, but imagine getting LASIK when you know you’ll be leaving the company in January or February. HUGE savings.
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At our last open enrollment period, the insurance premium on our co-pay only plan was due to go up by over $40 per week. We chose to switch to a less expensive premium, but higher out-of-pocket plan that involved deductibles, co-pays, and co-insurance. The real treat was tacking only half of the weekly savings onto our existing FSA contribution, which allowed us to cover the additional expense due to the plan change and “pocket” the difference (after taxes of course… :-( ).
Thanks for the mention!
I think FSAs are right up there with 401ks in terms of tax benefits because not needing to pay taxes on that part of your expenses is essentially free money.
Use it or lose it sucks and doesn’t make sense at all (I mean, even cell phone minutes have roll over), but it is what it is.
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I shutter at the idea of maintaining a FSA and the troubles you’ve descibed above. I advocate very high deductible health insurance that covers preventative care and catastrophic care. That’s what insurance is for after all, things you can’t plan for. With the high deductible, you’re eligible for an HSA, which is the only way to go. Of course, you can’t contribute quite as much as you can with the FSA, but you never have to worry about loosing money. You can contribute the max each year if you want and use it during retirement.
Good coverage of a benefit most people leave on the table and never take advantage of. Even if you just stashed $500 in there at the beginning of the year, you’d see some decent tax savings. I love our FSA, but we did a poor job of estimating last year. Had too much to spend at the end of the year.
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I have an FSA and I max it out for the year. I didn’t last year and ran out of funds in September. I see a specialist for an array of illnesses who doesn’t take insurance and the cost is $300 per visit. Needless to say, the FSA makes that much easier on my wallet.
My doctor is also a big believer in alternative remedies and she provides me with prescriptions for trigger point massage and reflexology so that is covered through my FSA too.
An FSA is also critical with my firm because our insurance plan changed and it no longer covers labs or tests until the deductible is met. $750 for an individual and then only 80% thereafter. I’m sure my FSA will be fully utilized again this year before the fall.
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I’ve never been a fan of thse. It seems to me that if you overestimate your medical expenses for the year, you end up using up your money at the end of the year on things you normally wouldn’t have done
I think that a FSA can probably be a bit of a pain to manage, and the tough part is to estimate what you’re going to spend. It may be a better idea for folks like my wife and I – because we know we’re going to have several thousand dollars in expenses for sure – with the birth of our first child, and my wife’s ongoing health issues. For us it will save quite a bit in taxes – and it makes it worth it to manage.
Yes I have used FSA 5 years in a row..I have used every cent every year. We only choose $1200 a year. I love the FSA because monthly deductions are before taxes and the debit card is so practical to use. Anyone who has it as an option….go for it!
One danger of having a big FSA balance early in the year is the (false) feeling that it is company money and it doesn’t matter what you spent it on. There is almost a desire to “make sure it gets spent”…
Pretend you will run out, so every dollar matters, and then shop around for lower-cost clinics and buy things on sale, etc.
Great overview, thanks for highlighting an often overlooked way to help people save.
FSAs will save the majority of people at least 30% on the funds they contribute (rough estimate). If anyone has questions please feel free to contact our company, we will gladly answer FSA questions, even for people who are not FSA participants through our company.