Nov 24, 2009

The almighty FSA (Flexible Spending Acount)

I love this time of year - Thanksgiving turkey, Christmas shopping, open enrollment....

Yes, for most of us, this is the golden time of year when we have to re-opt for our benefits, smack in the middle of the busiest season of holidays. Brilliant planning, I tell you. I just finished making my christmas shopping list and now I get to choose how much more I'm going to pay to keep my family insured for next year. (because it's almost always more, isn't it?) Hooray!

One benefit that I find is TERRIBLY underused is the Flexible Spending Account. You might also see phrases like "Healthcare Spending Account" or "Dependant Care Account", but it all boils down to the same thing: An amount of money that YOU choose gets taken out of your paycheck PRE-TAX (same as your health insurance)every week, and you are able to use it to pay for pre-determined goods or services. What exactly does that mean?

See if you can answer "yes" to any of the following:
Do you and your family members
- visit the doctor at least once each every year and pay a copay?
- fill a prescription and pay a copay?
- use over the counter cough medicine, pain medecine, antacid, bandaids, vitamins, or anything else in a drugstore that can be considered "medical"?
- have a baby that needs diaper rash ointment?
- wear glasses or contacts?
- wear braces or have a child that will be getting them this year?
- have other dental work that won't be fully covered by dental insurance?

(these are generally ALL acceptable expenses for a Flexible/Healthcare spending account - check with your benefits provider to be sure. You can't use it to pay your health insurance premiums, or for nursing home or other long-term care arrangements)

What about these, do you:
- have a child in daycare?
- plan to send your child to a full-day camp?
- have an adult family member in daycare?
- have a family member that requires in-home care not covered by insurance?

(these all qualify as expenses for a Dependant care account, but check with your provider. Most do NOT count sleep-away camps or nursing home costs)

So you can actually set aside a portion of your paycheck every week to cover these expenses, that's helpful for budgeting...but how can an FSA save you money?

Remember, money for a flexible spending account is taken out PRE-TAX. If you just use money deposited in your bank account to pay these expenses, you've already given the government their share before you have the money to spend. By having it taken out pre-tax, it reduces the amount of pay you're being taxed on! Let me use myself as an example...

I decided this year to sign on for $1000 in my FSA (that amounts to just over $19 per week out of my check). Let's say conservatively that I'll be hit with 25% tax each paycheck. In order for me to have the SAME $1000 to use for expenses after taxes, I would have to make $1335! No typo there - I save $335 in taxes by having the money put away pre-tax!!! What could you do with an extra $300 this year?

The thing I find that scares most people away is the "use it or lose it" clause that all FSA's carry, meaning if you don't use all the money in your account by the end of the year, it goes away. But before you get too worried, take a look at the list of eligible expenses...many of them are regular, fixed costs! Here's how I figure out how much to put away:

- # of doctors appointments (in my case, regular checkups for us and the kids, plus visits to the specialists for my husband's diabetes and ADD, I also added 2 sick visits for each child) x our copay
- Cost of maintenance medications (anything you take daily, weekly or monthly). Figure out how many times you'll refill them over the year, and the copay each time.
- Cost of any planned procedures or medical equipment (including glasses, contacts or dental gear). My doctors offices helped out a lot in estimating cost ahead of time.
- I figure in about $75-100 a year in "incidental" expenses like bandaids, aspirin, cough medicine, and unplanned prescriptions. If you have low copays, a lower number may work better for you.

Healthcare spending accounts are easy to use up if you have anything leftover come December - I rarely do but if there's $10 or $12 still in there I stock up on band aids and Neosporin...having boys in the house makes that a no-brainer :) But it can just as easily be used on vitamins, pain relievers, or anything else you buy over the counter with regularity.

Dependant care accounts are a little different - most dependant care is a fixed weekly or monthly cost, so it should be pretty simple to tally up a year's worth. But if you have leftover money, there's not much you can do about it. Those I know who use this kind of pre-tax account have told me they figure out their yearly cost, and put about 75-80% of it in a Dependant care account. Yes, there is a period of time where they're paying after-tax money at the end of each year, but they never worry about losing unused funds.

As always, check with your own benefits provider to confirm what is covered, and how you get access to your money (we recently switched to a system that gives us a "credit card" linked to the account but before that we had to save receipts and submit them for reimbursement). It also might not benefit you if your out-of-pocket expenses are high enough that you can use them as a deduction on your taxes (FSA money cannot be deducted since it's pre-tax). But if it'll put a few hundred dollars back in your pocket, it's worth looking into!

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1 comment:

Katterine's Insurance said...

Thanks for the list. And the reminder. What I found is that dental and vision supplemental plans like can also be deducted from the FSA. Tricky huh!