Our family has used a health care flexible spending account (FSA), sometimes called flexible spending arrangement, offered through my employer benefits plan for the last several years. The health care FSA benefit offers some excellent conveniences worth mentioning for individuals or families considering signing up for the plan. At the same time, there are a few things you should be cautioned about.
This article is not meant to be an exhaustive overview of the health care flexible spending account, but is meant to offer some of the highlights based on personal experience and provide some reliable references for more information. Please note that I’m not a tax professional, so I’m not going to attempt to help you determine if the use of the plan makes sense to you from a tax standpoint. Please seek guidance from a professional in this area.
What is the health care FSA?
A health care FSA allows employees to be reimbursed for medical expenses. You elect an amount to be voluntarily withheld from your paycheck before taxes through a salary reduction agreement. This amount is divided by the number of pay periods in the year which is the amount deducted from your paycheck each payday. The IRS also allows employers to contribute to the plan.
Health care FSA eligible expenses
The general eligible expenses are for health care deductibles, co-payments and coinsurances as a part of your health plan. It may also include other dental and vision expenses and over the counter medications. You cannot receive reimbursement for amounts paid for health insurance premiums, long-term care coverage or expenses, and amounts covered under another health care plan. If you would like more information on the IRS approved deductions click here.
Advantages of a health care FSA
It increases our spendable income each month
Probably the biggest advantage of a health care FSA is the deductions are taken out of my paycheck before taxes. Therefore, we decrease our taxable income by the amount deducted each pay period.
We have peace of mind
Once the plan begins for the year we can begin submitting expenses to be reimbursed. We can actually deduct more expenses than what we’ve elected to be withheld for the pay period as long as we don’t go over the amount we elected for the year. Since our family has planned ahead the amount to be withheld, we have great peace of mind in that we can go purchase over the counter medication or pay for a copay without having to figure out where to find the money for these expenses.
FSA debit card
Some plans are now offering an FSA debit card. This is a huge added convenience because we can use the card just like we would our checking account debit card. Most doctor’s offices or larger retail stores such as Target will accept it. Before having the debit card option, we had to submit every receipt for reimbursement. Now, we use the card and keep our receipts in case our plan requests more detail about an expense.
Considerations before enrolling in a health care FSA
Use it or lose it plan
Probably the biggest consideration in planning is the FSA is a use it or lose it plan. At the end of the benefit year, the remaining balance cannot be carried over into the next year. However, the IRS says that an employer can allow up to a 2 1/2 month grace period to use up the remaining balance. Given the use it or lose it consideration, it’s critical we estimate well our medical expenses for the year.
We typically take a best guess at the number of doctor’s visits for normal check up and the associated copays. Of course, we can’t predict every medical expense, but there are sometimes planned procedures we can account for in our estimates.
I will mention we have come up short in our estimate in the past because of unexpected medical expenses. This required us to make adjustments in our budget for health care savings each month on top of the pre-tax contribution. Remember, the pre-tax contribution doesn’t stop until the end of the year. In this case, we had enough health expenses that used all of the monies in the FSA before the year ended.
Limited changes allowed
We can change or revoke our election only if there is a change in your employment or family status that is specified in the plan. Therefore, if we notice mid-point through the year we may have elected to contribute too much, we can’t make a change unless we meet these criteria.
Experience has show that we have to be organized in our use of our health care FSA. Some of our purchases do require we submit a receipt with more information about our purchase. Every time we use the FSA debit card, we keep the receipts and store them in an FSA envelope of our financial file. If I receive an email or notice requiring more proof around the purchase, I find the receipt, fill out a form required by my benefits department and fax both the form and receipt for review. Note: I’ve never had an expense denied after showing the required information.
I recommend starting by estimating your medical expenses for the next year. The best way to do this is to review receipts or statements from the current or previous year. If you don’t have this information, you have to take your best guess at the total number of routine doctor appointments, over the counter medical supplies or medicine you’ll need as well as any scheduled procedures. Once you have the total, you can use this FSA contribution planning worksheet to determine your potential savings.
What experiences have you had (positive or negative) with the health care flexible spending account?
- Internal Revenue Service, Publication 969
- Internal Revenue Service, Publication 502
- Automated Data Processing (ADP) Health Care FSA Overview
- Wikipedia: Flexible Spending Account