One of the greatest tools available in the healthcare world is the Flex account, or FSA (Flexible Spending Account). What is essentially a tax-free account for your health expenses, you can contribute money to it each year, and pay for most health expenses with it (again, tax free). It’s not one of those premium accounts that is reserved for the finest medical plans, available to only the wealthy. No, it’s available to anybody and everybody. And that’s exactly who should take advantage, because who likes paying taxes?
That being said, there are a couple of things that you need to know before you jump into an FSA. Unfortunately it’s not as easy as transferring a few thousand dollars over and not paying taxes on it. No, like most other things in life, there are rules.
Let’s take a look at a few of the finer details so that you can see if a Flex account is a good idea for you.
How is it funded?
It’s really easy, you decide what kind of contributions you want to make for the next healthcare plan year. When January rolls around (or whenever your health plan renews), the money starts to come out of your paycheck before taxes come out. This is where you see the serious savings.
How much can I contribute?
Most states allow for a contribution of $2,600 each year. Your spouse can also contribute that same amount, so if you’re on a family plan this can mean huge savings. Remember, the money is put in from your paycheck before tax, so it happens at the employer level. It’s not like other accounts where you can just transfer a bunch of money over at any point.
What can I purchase with my FSA?
A wider range of things are eligible for pre-tax purchases than you’d think. Here are a few of the most important ones:
- Prescription medications
- Some over the counter medications
- General health items (like first aid kits and thermometers)
- Child Care (with a specific type of FSA)
What happens if I don’t use all the money in my FSA?
The “use it or lose it” rule, yes if you don’t use all the money, you forfeit it. And it doesn’t mean that you get the money back, and have to pay taxes on it. You actually lose that money. So its really important that you don’t over-fund the plan. You do, however, have a few redeeming circumstances – you can roll $500 into the next year, and you have an extra 2.5 months to spend your FSA for that plan year. That gives you a total of 14.5 months to spend that money.
How much should I put in to my FSA?
You’d have to do a little bit of planning to get a picture of what your next year’s expenses are going to be like. For those that have a chronic condition or a series of treatments coming up, that’s probably not hard to estimate costs. But for those that don’t have any planned treatments coming up, we should consider things like child care or medication costs.
Sure, everybody should use an FSA, but who should undoubtedly have one?
If you fall under one of these 2 categories, you should seriously have an FSA –
- Those with a chronic condition – Ok this is obvious. You know that you have 6 procedures coming up, a handful of medications and even inpatient hospital stays. You’re likely to hit your out of pocket limit, reach your deductible. This person probably knows that they should be funding their FSA.
- Families – This group of people may be less likely to know about the real value of FSAs. If you’ve got a couple of small children, chances are high that your kids are going to have a few doctor visits, and have to be visiting the daycare center more than a few times per week. FSAs can save serious money for families (note that you need a particular type of FSA to pay for this)
Check out this Flex account calculator to see what you should be putting away this year