Take Advantage Of Flexible Spending Accounts
One of my favorite things regarding money is the FSA, or Flexible Spending Account, that is offered through my spouse’s work. However, if you are like me, the first time you heard the term mentioned you had no idea what it meant and in fact, it may have sounded a little shady. If you have the option of a flexible spending account through your employer (or your spouse’s) you owe it to yourself to at least find out about it if you haven’t already - you may be in for a pleasant surprise!
So What Is A Flexible Spending Account, Anyway?
A Flexible Spending Account, or FSA for short, is a way of saving money pre-tax for qualified expenses, generally limited to health care or child care. It is an account administered through your workplace that you can save up to a pre-specified limit each year through automatic payroll deductions, and use that money to be reimbursed for (or pay for) qualified expenses. The amount you are allowed to save pre-tax varies from company to company, so you need to investigate it through your own HR department. The amount is also generally flexible within certain parameters and chosen by you - it is not a specific “this is the only amount you can save” figure. This is a annual “use it or lose it” type of program - if you do not use all the money set aside in the account each year, you lose the money. So even though it is set aside pre-tax, if you end up forfeiting money because you don’t use it, that doesn’t work out.
I Don’t Get Sick Often, So What’s In It For Me?
Even if you don’t have many health care expenses, the program can still work for you. First off, the program can be custom-tailored to fit your needs. If you generally only spend $150 a year on medical expenses, then you can save $150 in your FSA. Secondly, the term “medical expenses” covers a wide varitey of things, not just doctor and hospital visits. Most non-precription drugs qualify for FSA reimbursement, as well as dental and vision care. For example, on my receipts from Walgreens or CVS, there is a designation on each item if it is aFSA qualified item. Things as mundane as asprin and ibuprofen qualify.
My Life Is Unpredictable. Help!
That’s okay. My life is somewhat crazy too. This is my strategy. I set my FSA savings number at a reasonable number compared to prior years’ usage. I then designate things I would like to do in a given year, but can be put off until the next year (or longer). Things like a set of prescription sunglasses for my spouse. Then, if I have extra money in the FSA close to the end of the year, I will go ahead and do things like that. I also save receipts for things I don’t normally bother to go through the process of claiming, like non-prescription drugs. If, close to the end of the yea, I have a lot of unclaimed money left, I will submit those claims as well. I also, if needed, can stockpile some non-prescription drugs.
I have two small children and a crazy life. I haven’t had to resort to too many tactics yet. 
So if you have the option of an FSA and have never looked into it, give it a whirl. Lowering your taxable income without lowering your actual income is a good thing. :) And I love getting those reimbursement checks throughout the year!
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September 10th, 2008 at 9:42 am
I once signed up to put $3K in FSA to do LASIK, then I went to do the surgery with a 6 month same as cash loan with 0% interest. However, I get reimbursed right away even though I only have paid $100 into the account at that time. I put the $3K into my ING savings account and earned interest for 6 months for free. Try this if you are going to do LASIK with a same as cash loan!
September 10th, 2008 at 10:11 am
I love those reimbursement deposits too. My wife and I use it as a way to help us save without really having to plan for it in our budget. Its several thousand dollars a year without evening trying too hard. I’m looking forward to being able to use the dependent care FSA when our new baby arrives next year!
September 10th, 2008 at 11:01 am
With my diabetic son, the Flex account saves us a great deal of money and makes handling our monthly expenses much easier.
We always max ours out and spend all of it.
Anybody know if you can expense counseling or psychological treatment? A reader of mine asked and I didn’t know the answer.
September 10th, 2008 at 11:10 am
You may also want explain the difference between an HSA and an FSA. I work in HR, and a ton of people get those confused.
HSA = savings acct you keep with you forever, as it rolls over each year. Also, can be maxed out each year as another vehicle for retirement savings.
FSA = Use it or lose it. (As you mention.)
I love your blog. Thanks for talking about these important topics!
September 10th, 2008 at 1:00 pm
I really like having an FSA. My only complaint is that my particular FSA host doesn’t send statements to let me know how much I have left to spend. I know this is deliberate because what I don’t use they keep, but it would be a nice touch of customer service on their part to at least send quarterly statements.
September 10th, 2008 at 1:44 pm
@Shan - you may have an online place you can keep tabs - our provider doesn;t send me statements either but I can check it out online so I am good with keeping track. Usually
September 10th, 2008 at 2:22 pm
While the FSA is use it or lose it most companies allow you to still get reimbursed for procedures into the next year. My last 2 companies allowed you to submit expenses that occurred through March and gave us until June to submit the previous years claims.
September 10th, 2008 at 4:39 pm
This is interesting to me because next year we have a Tax Free Savings Account TFSA that’s supposed to kick in here in Canada. You set it up through a bank (ING is already gearing up to do it) and can put $5,000 per year into it, earning interest tax free.
The cool thing is, you can take money out for all kinds of things, not just retirement savings as a lot of people are proposing. You could save up for new glasses, orthodontics, a new car, a home renovation or whatever and keep rolling the money over from year to year until you have enough, earning tax free interest as you go.
The thing I’m thinking about though is that it’s easy to aay you’re going to put “x” amount away for this or that every month but sometimes it seems to get out of hand. You’ve got $10 here going to a gift fund, $25 going to your garbage and water bill, $100 for car insurance and so on, and so on. Pretty soon you aren’t making ends meet because so much of your current money is tied up waiting to be used in 3 or 4 or more months.
How do you deal with having healthy emergency, freedom, FSA and other accounts when you don’t have enough cash from now to payday to put gas in the car?
September 10th, 2008 at 6:47 pm
We take advantage of our FSA and for us, too, it’s been a real money saver. Vitamins and other supplements, reading glasses, cough drops, bandaids, all sorts of things are covered. We had to get a letter from a Dr regarding how vitamins are “beneficial to the health….” but that was easy.
I have learned that sometimes resubmitting the same claim will work if it seemed unreasonable to have been refused.
Also, as you suggested, you can plan certain expenses so that they are clustered within a two year claim period, same as with regular health insurance. An example for FSA would be to purchase contact lenses December ‘08, then not again until January ‘10. That way you could have a higher withholding every other year.
The fun thing is that even if you don’t use ALL the set aside $, you still reap the benefit of a lower pretax income. Saw somewhere on the internet a way to calculate the break even point, but can’t locate it now.
September 10th, 2008 at 9:40 pm
Shevy…True, it was hard to get the “Freedom” account (or Buffer Account, as I call mine) going. I recommend starting slowing and keep trying, even if you can’t do it all right away.
For a few months I didn’t always put the full $72 for insurance or $29 for water bill, etc. But even having something put aside really helped 3 or 6 months down the road when the bills came.
It’s part of the process of getting control. I found that as I started planning ahead for my irregular or infrequent bills, the “real” reality of the budget start to show through…We were $500 short a month, and something had to give. The process forced us to make some of those hard decisions about where to cut back (or make more.)
Now, I couldn’t be happier. I KNOW that I’ll be able to handle the bills as they come it, which makes it so much easier. Stick with it!
- K.
September 10th, 2008 at 11:39 pm
Shevy - I agree with Kathryn. it is something you can start small (honestly, we started with $25/month) and build up slowly. It seems insurmountable but every little bit of progress helps. We just now finally got to the point I can start converting some of our annual expenses to annual payments vs monthly payments. And, planning for those expenses exposes how your budget *really* looks - we convinced ourselves for a long time we were doing okay but we ignored annual expenses until they happened and were often caught short. Now our budget is bigger than before I started blogging but it is reflective of reality not just things that happen every month.
Start small. A little goes a long way!
September 11th, 2008 at 1:33 am
My previous civilian job was as an Employee Benefits Representative.
It always amazed me how employees of my client companies would tell me what they’ll predict to have in medical expenses for the next year and I’ll do some rough numbers to help them figure out what they should contribute for their FSA and then they decide not to contribute.
One lady was pregnant. Before the insurance plan pays she has to meet the deductible but she didn’t even want to put that into the FSA.
If you’re in a 20% tax bracket, $100 pre-tax in an FSA is the equivalent to $125 pre-tax of your take-home pay.
September 13th, 2008 at 11:36 am
Our HR department keeps telling us that setting funds aside in an FSA will lower our taxes, so our take-home pay will be better. NOT ONCE has that ever happened for me: every time I’ve done the flex plan, my taxes have remained unchanged and my take-home pay, which is far from generous, dropped.
More annoying, the university changed to a new vendor, and this outfit disallows many of the things we used to be able to pay for with the flex plan. When I bought some polaroid sunglasses, which were expensive and which my doctor requires me to wear with my contact lenses, they were disallowed — even after he wrote the flex plan administrator saying the glasses were a medical necessity!
I can see how a flex plan would be handy if you had a chronic illness or if you knew you had an optional surgical procedure coming up. But if your health is good overall, as mine is, you may find yourself coming to the end of the plan year with a bunch of unspent money about to be confiscated, and feeling you have to run around to unnecessary doctor’s appointments or buying extra pairs of eyeglasses and bottles of aspirin that you don’t need. I’d rather have the cash in hand and put it in my own savings account, thanks.
September 13th, 2008 at 7:57 pm
@Funny - if an employer is taking out money pre-tax, and isn’t actually reducing the taxes you pay, then they’re doing it wrong and not taking it out pre-tax.