HOWTO: Flexible Spending Accounts (FSA) Deconstructed
Posted on August 20, 2007
Flexible Spending Accounts (FSA) have been something I never fully understood. They seemed complex, cumbersome, and although a good idea, were executed poorly. Over the years FSAs have become simpler and more convenient, allowing the user to have real savings without all the hassle. There are two types of FSAs: health care and dependent care. Health care FSAs are for medical related expenses and dependent care FSAs are for child care and elder care expenses.
What is an FSA? FSAs allow an employee to set aside a portion of their earnings to pay for qualified expenses as established in the employer’s plan, but most commonly used for medical expenses as well as for dependent care or other expenses. Money is withdrawn from each paycheck prior to payroll tax, resulting in a substantial savings by using pre-tax money to pay for qualified expenses.
What are FSA qualified expenses?
Health care FSA expenses:
- Medical, dental, and vision deductibles.
- Co-payments (amount not paid by your health insurance)
- Amounts paid over health insurance limits
- Expenses not covered by insurance including over the counter drugs
- Vision care (glasses, contacts, solution, exams, etc)
- Dental care (cleanings, orthodontics, crowns, etc)
- Treatment/therapies
- Medical equipment
Dependent care FSA expenses:
- Child day care
- Child in-home
- Nursery and pre-school
- After-school care
- Summer day camp
- Elder care center
- Elder in-home care
How do I participate in FSAs? First, take a look at your previous spending on health care to get a historical average of what you spend on medical and dependent care last year as well as what you plan to spend the next year. Then decide on a yearly amount you plan to contribute to the FSA. Your employer will then deduct a prorated amount before taxes from paychecks throughout the year. Whenever you spend on qualified expenses you pull from the savings account using an FSA Debit Card or saving receipts and getting reimbursed.
What is the catch? There are a couple of major things to understand before jumping into an FSA. First, the money that is not used will be lost, so there is a “use it, or lose it” policy. Second, you will need to re-enroll each year. Be sure prior to each yearly enrollment you assess how much you will need to fund the FSA account.
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6 Responses to “HOWTO: Flexible Spending Accounts (FSA) Deconstructed”
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Thanks very much for the link! You’re right, FSAs are tricky. I’m not sure it’s really the best way for the government to fund pre-tax medical spending, but if you have a chance to use it, it’s too much of a good deal to pass it up. It requires a lot of research and careful planning, which is what personal finance is all about, I guess!
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Great post! I love my FSA! I save hundreds in taxes every year. I use mine to purchase everything (even advil and contact solution).
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