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 Understanding Flexible Spending Accounts

Health care costs are continuing to climb, making it a top priority for consumers to get the best bang for their medical care buck. One of the options people are choosing is an FSA, or Flex Spending Account.

An FSA is a pool of money that is used for health care costs that aren’t usually covered by health insurance. It works like this – an employer deducts the money from an employee’s paycheck, pre-tax, and deposited into a separate account. Then the employee receives charge cards for themselves and their dependents that can only be used for medical costs. Since pre-tax dollars are deposited into this pool, the employee will be able to save a bit more money when it comes time to giving Uncle Sam his cut.

An FSA isn’t perfect

 Like with a lot of government-related concessions, there are downsides. The biggest con associated with an FSA is the use-it-or-lose-it clause. There are no minimum yearly contributions that you have to make to the account, but if there is money in the account that is unused at year-end, it could be lost. It will go back to the employer and it is put towards costs for future management of the plan, so you’ve just lost that money.

There are also contribution limits, so you may not be able so use an FSA for all of your expenses. The max yearly contribution will be lowered to $2,500 per year by 2013, according to Obama’s healthcare reform law.

But it can be a big help

 Even with those shortcomings, an FSA can still be a huge help against costs that health insurance plans won’t take care of. For instance, if you plan to have Lasik surgery or you need dental braces, and you have insurance deductibles to worry about, you can use the pool of money to mitigate the costs.

Another pro with FSAs is that you can include dependents on the plan. Your dependents don’t even have to be on your employee’s insurance coverage. Each plan is different when it comes to allowable expenditures for dependents, so make sure to look into them.

A lot of plans follow the calendar year, but there are some that can keep going well after Dec 31st, to around April 15th. This means that you will have about 16 months before you lose unspent money, rather than just 12. Just remember that it is required that medical services and purchases be performed before the deadline. You also have to make any reimbursement requests within a specified timeframe in order to get full compensation.

This is almost like a medical rewards credit card, since you effectively save 25% or more on medical expenses, depending on your income tax bracket. Just make sure you spend your pool of money before it disappears.

Some FSA tips

 You can view this IRS overview for FSAs, which will show you the employer and employee guidelines.

As mentioned, here are some tips that you can use for making the most of your FSA:

  • Avoid putting more money into the pool than you think you’ll spend. Yes, the tax advantages are great, but you could end up losing the money altogether if not used. You should under-contribute vs. over-contribute.
  • If you are anticipating a large medical bill in the near future, make sure to contribute enough to cover the expenses. You can do so by scheduling an initial checkup in the previous year to receive an estimate from your doctor of how much you’ll need.
  • When you’re unsure of whether a treatment or procedure you receive is covered, make sure to ask first. You’ll be surprised at how liberal these plans can be.
  • Don’t throw away any receipts. Instead, give them to your employer within the reimbursement timeframe.
  • Keep track of how much is being spent on health care costs throughout the year, so the following year can be better predicted as far as contributions go. You can ignore any one-time cosmetic procedure expenses.

Mom’s Plans’ comment:  We used a FSA for many years when I was working full-time and my husband was a full-time student.  It is a great way to save for medical expenses you know you will have to pay during the year.  It is also a great tax savings.  I highly recommend contributing to a FSA.

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