In 2013, We’re Trying a Flexible Spending Account (FSA) For Health Care Expenses
Posted by jefferson on Nov 27, 2012 in Saving Money | 23 comments
I first heard about Flexible Spending Accounts (FSAs) a few years ago when my company began offering them as a benefit. These accounts offered a method for employees to pay for medical and dental expenses that are not covered by insurance using pre-tax dollars, and can offer significant savings if used properly.
While intrigued, I was reluctant to sign up for an FSA because of the fact that if you don’t use the money in the account by the end of the year (and a brief grace period), then you lose it. This seemed like a major risk. It isn’t just a “benefit” that you lose if you don’t use it, this is real money that is withdrawn directly from your paycheck. Because of this reality, at the end of the year you will often hear advertisements from businesses pushing Lasik surgery or dental procedures, reminding customers to spend the money left in the FSAs while they still can.
Throughout this year, Michelle and I have applied vigor to every single financial decision that we have made, and this includes carefully examining the options for employee benefits that my company provides. I wrote recently about deciding between the standard plan and the “consumer driven plan” for our medical insurance, and after crunching the numbers, we decided to stick with the standard plan for this year, but to closely monitor what our costs would have been had we had selected the other option. I should note that thanks to a comment from one of our readers, we realized that we had an out of pocket maximum on either plan that would prevent us from being completely ruined by a medical emergency, which was a great think to learn.
After doing some research, it was clear that Flexible Spending Accounts can actually be a major supplement to your health care plan regardless of which option you choose. If you use a standard health insurance plan, an FSA can cover your co-pays and deductibles. If you opt for a consumer driven plan, the FSA will lesson the pain of the “donut” period that hits after your HSA has been exhausted and you are required to pay for the medical costs in full. By allowing you to pay with pre-tax dollars, you are significantly increasing your purchasing power! The following items can all be paid for using using an FSA (Note: This varies plan by plan):
- Medical, Prescription, Dental, and Vision Copays
- Medical, Prescription, Dental, and Vision Deductables
- Orthodontia
- Laser Eye Surgery
- Over the Counter Medicines and Supplies (bandages, braces, lactation devices, dentures, contacts, tests & monitors), family planning items, first aid supplies, diabetic supplies, bandages & wraps, reading glasses, sunscreen, wheelchairs, nearly all prescribed medicines.
- Cosmetic surgery
- Health Care Dues
- Paycheck Deductions for Coverage
- Pain Relief, Cough, Cold & Flu OTC medications
The amount of money that you can contribute to an FSA is capped at $2500 this year, which is half of what was allowed in previous years. You must sign up for the plan before the year, and you cannot change your mind once the year has begun. On January 1st, the $2500 is deposited into a savings account which you can draw from throughout the year. The full amount is then divided by the number of paychecks you receive in a year, and that amount is taken out of each paycheck with pre-tax dollars. At my place of employment, the plan also provides a debit card which can be used for any FSA eligible expenses, including co-pays at the doctor, dentist, or eye doctor or any of the other items mentioned above. This means that you shouldn’t have to submit any paperwork or anything to get reimbursed, which is a huge bonus (although you should certainly save your receipts). Of course, an added benefit to allocating tax free dollars in this fashion, is that it reduces your overall tax burden. The less taxable income you have, the lower the amount of taxes that you will owe. If you are lucky, perhaps this will even drop you into a lower tax bracket.
After carefully going over our numbers, my wife and I determined that the $2500 number sounded pretty reasonable for our family of five. We expect our actual medical costs to fall somewhere right around that amount, it is pretty awesome that we can manage this portion of our finances with tax-free income. If our actual number falls below that $2500 marker, we have a couple of family members that may need braces in the next few years, and we can certainly go ahead and get that process started with the remaining amount. It would be an absolute no-brainer to go this route if we had a large medical expense on the horizon (a surgery or a childbirth, for example), but without that– it really feels like a good option for the ordinary medical expenses that our family incurs.
Regardless of how it goes, we will keep you updated with our Flexible Spending Account experiment as it unravels here at See Debt Run. Do any of you have experience using an FSA? Have you ever had money left over at the end of the year?
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Just a heads up, I believe that OTC medicines and supplies are no longer flex eligible unless you have a prescription for it. (Federal law – should be true for all plans – but this was new for 2012.)
Mr. PoP has an HSA through his work, and we have a Flex account set up at my office that we’ve funded at $600 for the past two years. We spend out of the Flex account first since it can’t roll over, then the HSA – though legally that can only be spent on Mr. PoP.
It works pretty well, though I’ve heard it can be tricky to use flex accounts to spend on braces and other things that might be prepaid since you can’t be reimbursed via flex for medical services that you haven’t gotten yet.
I’ve never had money left over at the end of the year, and I just used the last of mine up this month, so I think unless something major happens, we’re pretty spot on with our health spending estimates.
Mrs. Pop @ Planting Our Pennies recently posted..That’s Not Frugal, It’s Theft!
We will almost certainly find out more about this as the year goes along.. Especially the braces part. If we end up budgeting too much, we will certainly scale back the next year.
I have never had a FSA, but I hope that it works out well! It sounds similar to an HSA except for the “use it or lose it” part, right? Anyway, it sounds like you have a reasonable amount estimated for your expenses. Good luck!
Holly@ClubThrifty recently posted..The Success of Small Business
It is a bit different than the HSA, in that it is your money from your account. But yeah, the use it or lose it part is the big caveat.
I think that is a very smart plan, depending on your tax bracket, it’s like getting 25% off. I have an HSA that I use for medical expenses, but have used the FSA to pay for day care. I believe as long as you get a receipt, you can prepay at the end of the year if you need to. Lots of people do that in our office. They wait until the last minute and come in and pay on December 31st even if they can’t be seen that day and we give them a receipt. I also believe you have a grace period if you miss the Dec 31st deadline unless your employer is a real stickler.
Kim@Eyesonthedollar recently posted..!Obesity: Taxes In and Taxes Out
We do have a grace period at the end of the year.. and I don’t think I would have made the jump without it.. Do you see a massive influx of customers at the EOY with folks looking to burn through their FSA money?
We have an FSA and it truly is a great thing! We’ve been using an FSA for the past 3 years. It has helped us so much and we’ve always used every penny. It’s good that you guys are going this route.
Mackenzie recently posted..Christmas Budget: A Must Have
Awesome.. I have heard a ton of success stories of real world savings.. I definitely hope to follow that path.
FSA is great, but I do not use one. I have an HSA which I absolutely love! The tax benefits alone are reason to put money into it.
DC @ Young Adult Money recently posted..Working in Television and around the Globe: Interview with Brandy Green of Ghost Hunters International
We had an FSA when I was with my former employer and they’re great…as long as you use it all up. It’s a shame you can’t use it on OTC drugs really anymore as it’s did not use to be that way. Now that we’re running our own business, we’re in the process of setting up an HSA.
John S @ Frugal Rules recently posted..5 Frugal Ways to Start Investing Now
Agreed.. That is a bit of a bummer.. It would be nice if we could just “stock up” at the EOY..
Looking forward to hear how it goes. I fdo taxes for someone who has an FSA, and it’s worked out well for them because their insurance is garbage. Not to mention lowering their tax burden quite a bit
Jacob @ iheartbudgets recently posted..Our First Budget Story
I had a FSA a few years ago and I didn’t spend hardly any of it. So when the end of the year came I made a dash to the pharmacy and bought a ton of over-the-counter stuff (which was acceptable at the time). I had more pepto-bismal, bandaids, and cold medicine than I knew what to do with. lol
This year we strongly considered signing up for my wife’s FSA so she could get lasik surgery this year, but the finances just aren’t where we want them to be so we had to pass. Hopefully next year though!
Jason @ WorkSaveLive recently posted..Save Money this Christmas – How to Make Your Own Christmas Cards
I really like our FSA, but I recently learned that the FSA might not cover over the counter stuff in the future and that I’d need a prescription in order to pay for it with my FSA. I since cut down how much I put into it.
Bill recently posted..Why You Should Refinance a Car Loan at a Lower Rate
So, does your work keep the money if it is not used? I probably would have waited one more year to see what happens with Obama Care in 2013. However, I have heard good things about FSA and most people who have them do like them. It is just health care in this country is definately at a cross roads.
It’s understandable that cosmetic surgery isn’t included. Can you imagine getting a tax free nose job?
Mandy @ MoneyMasterMom recently posted..Net Worth is not your Self Worth
My wife and I are enrolling in the dependent care FSA and health care FSA. The best thing about the FSA plans is that we get a 35% discount on services we were already going to have to use by simply being proactive. Who doesn’t love a discount
Anyone who has a child who will require braces would be crazy not to take advantage of if plan. Tax free braces makes that million dollar smile a little easier to swallow.
An FSA illustrates an odd bit of human behavior. People will often focus only on what they stand to lose(leaving money on the table), rather on the trade off: money saved compared to money possibly lost.
A $2,500 contribution saves 35% (federal income, FICA, and state income taxes) on average or about $900. Under this scenario you are still $400 ahead even if you leave $500 in your account unspent and lose it.
Kevin @ Employee Paid Benefits recently posted..My Baby Brother Was a Pre Existing Health Condition
I hope this works out well for you. I have a high deductible plan at work, so I use my HSA religiously. I don’t have a FSA, but I understand the benefits. Best of luck.
Jason Clayton | frugal habits recently posted..Great Reads of the Month (Monthly Roundup for November – 2nd Addition) + a video to bring in December with a smile
Especially with kids who will most likely need braces in the near future, this sounds like a good decision to make. I think that when you have a family and 3 kids to worry about its obviously always stressful to take financial steps like this, but the way you laid it out makes it sound like it would be a good choice for you guys right now.
Kelly@Financial-Lessons recently posted..How to Make Your Videos go Viral
Right now we don’t have a FSA, but I think it makes a lot of sense for folks who have kids or medical needs. We are pretty healthy (thankfully), so I’m not sure we’d spend all of the money if we put it in. I have thought about lasix surgery, and they year I decide to do that (if I do), I’d definitely do an FSA.
KK @ Student Debt Survivor recently posted..Frugal Parents Bought a New Car-They’ve lost it
Sounds like you’re excited about your FSA, Jefferson! Because your new flexible spending account is pre-tax, it can help you save up to 40% on each dollar you put in your account.
You mention that Pain Relief, Cough, Cold & Flu OTC medications are not FSA eligible, but they are. These OTC items contain medicine and therefore require a prescription to be reimbursed by your flex spending account – but you can absolutely buy them! You can still buy thousands of FSA eligible items without needing a prescription ranging from band-aids to shoe inserts to blood pressure monitors to sunscreen and much more.
If you’re wondering about other products that are FSA eligible, check out our Flex Spending Eligibility list.