What is a Flexible Spending Account?
A Flexible Spending Account is an employer sponsored program that allows you to set aside pre-tax dollars to pay for out-of-pocket medical or childcare expenses. The advantage to these programs is that you avoid paying Federal and State income taxes, and FICA taxes on each dollar that is set aside. This leads to most people saving at least 25% on each dollar that is deducted.
The downside to a Flexible Spending Account is that the accounts are year-to-year acocunts, and whatever dollars you set aside for a given year, you need to use up in a given year, as unused dollars are forfeited to your employer.
What types of expenses are eligible for a Flexible Spending Account?
Well, each employer can decide to set different rules, but here are some general rules that apply to many Flexible Spending Account programs:
Health Care FSA - the general rule of thumb is are you doing something or taking something to treat a current or imminent medical condition? If the answer is yes, then you have an expense that is going to be eligible for a tax break through your flexible spending account.
Examples of commonly claimed expenses:
- Deductible, co-pay, and co-insurance
- Dental expenses including root canals, orthodontia, cleanings, etc. (does not cover teeth bleaching)
- Glasses and laser eye surgery
- Chiropractic care
- Prescriptions
- See full list
Dependent Care FSA - the dependent care FSA allows for a tax break for expenses you incur while you go to work, or if you are married, while you and your spouse go to work. Typically, the expenses are for child care, but can also be for care of an older dependent who needs some assistance with in-home care.
Examples of commonly claimed expenses:
- Daycare
- Before and after school care
- Pre-school
- See full list
How does a Flexible Spending Account work?
Each
year during your employer's open enrollment period, you decide how much money you would like to have deducted for the upcoming plan year. That amount is then deducted evenly from each paycheck over the course of the plan year. As you have expenses, you submit claims (or use your FSA debit card) and you are reimbursed, and that money is never taxed. Expenses are eligible if the service giving rise to the expense is incurred during the plan year. Please note that this is different than saying you paid for an expense during the plan year. If you are billed or pay for something for which the expense ocurred before the plan year started, you cannot claim that expense.
Why SHOULD I enroll in a Flexible Spending Account?
Well, the tax savings is pretty significant. If you have regular medical or childcare expenses, or if you are consistently paying X amount for your medical expenses, you should take advantage of the Flexible Spending Account to save some additional money.
Why SHOULDN'T I enroll in a Flexible Spending Account?
If you do not spend very much in medical expenses each year, or if you or your spouse are enrolled in a High Deductible Health Plan with an accompanying Health Savings Account, you should not enroll in the Flexible Spending Account. The FSA isn't for everyone, but it is probably a good plan for at least 80% of the eligible people. If you don't think the FSA would benefit you, I would encourage you to take 20 minutes and review your family's medical expenses for the past two years. How much are you spending? Some national studies have shown that an average family of four spends at least $1,200 on out-of-pocket medical expenses each year. If you are average in this respect, set aside $750 in the Flexible Spending Account for the next year, and you will be surprised at how quickly you use up the funds.