Flexible Spending
Accounts
Most employers offer flexible spending
accounts (FSA’s) where you can set aside a portion of your earnings tax free to pay
for things like medical expenses and childcare. FSA’s can save you about 30% on your
out of pocket expenses since you don’t pay taxes on the amount you put into them.
FSA’s can be used for the following expenses:
- A health care FSA
reimburses for co-pay amounts, procedures not covered by your medical insurance,
prescription drugs, dental exams, eyeglasses and contact lenses, psychologist's visits and
more.
- A dependent care FSA
reimburses for services that allow you to work, such as childcare, day care for the
elderly or disabled.
Only 15-20% of people take advantage of FSA’s for a number of reasons.
- Fear of losing money:
Current law requires that any money left in an FSA at the end of the year revert to your
employer, not to you. This use-it-or-lose-it rule causes many people to severely
underestimate their anticipated expenses-and, therefore, reduces their gain.
- Paying twice
upfront: The pre-tax dollars deposited in your FSA come directly from your gross
earnings. This money is held until you submit a verifiable receipt for an expense. That
means you must first spend again by paying for a service upfront, and then file to collect
reimbursement. If your budget is tight, you might not be able to afford that temporary
double hit on income.
- No changes
allowed: With few exceptions, once you've signed on, you can't change the amount
your FSA withdraws, or what that money can go for, until it's time to set up the account
for the next year. Mid-year changes are permitted if your marital status, employment
situation or number of dependents changes.
- No child-care
tax credit: If you set up a dependent care FSA, you cannot also claim a tax
credit for childcare costs. Benefits experts agree, however, that if your gross income is
about $28,000 or more, you'll do better using an FSA than claiming the tax credit.
Using your FSA can save you
money though. If you are afraid of using it because of one of the above reasons, try it on
a reduced amount to see how it works. Let's assume you're in a 28 percent tax bracket and
you put $2,000 of your pre-tax earnings in a health care FSA. You can make claims to the
account for services you or anyone included under your insurance coverage receives. The
FSA money is reimbursed to you without a federal tax bite and, in most states, without
state or local taxes chomping at it either. You save at least $560. Everyone has out of
pocket expenses such as copays, and they add up to more than you think. By putting that
money aside in an FSA you can save.
Maximizing your FSA is easy:
- Check last year's
medical bills. Add up your out-of-pocket health expenses for your entire family.
- Keep pace with
co-pays.
- Talk to your
childcare provider about expected increases.
- Re-assess your FSA
amount each year.
- Remember to allow for
shifts in care expenses.
- Use all money in your FSA by year's end.
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