Money In Your Pocket: FSAs

I talked two people into opening up Flexible Spending Accounts (FSAs) this week, which as far as I'm concerned are money in your pocket. Normally our Open Season (when you can start or change contributions to an FSA) ends in early December, but for some reason they've extended the deadline to the end of this month.

FSAs were established in a federal law that allows your employer the option of setting up a tax-privileged account for you, which you fund with pre-tax payroll deductions for health and dependent-care expenses.

How FSAs Work
Because the money is pre-tax, you don't pay federal (and usually state) income taxes on it, which means most people save between 20% and 40% depending on their tax bracket.

The catch is that you have to fund it with regular contributions from your paycheck and it's use-it-or-lose-it for each year -- anything you don't spend in a given year is forfeited (I'm guessing to pay administrative costs). So if you miscalculate and put in too much, as I did this year, you can end up with a big balance at the end of the year.
For example, let's say you put in the maximum of $5000 (not unreasonable for a family with kids) and spend it all. If you're in the 30% tax bracket you would save around $1500 on your taxes (which is not chump change).

The health care plans can be used to pay for anything not covered by your medical insurance, ranging from co-pays to elective surgery, and even including over-the-counter medicines such as vitamins. If your insurance has a cooperative arrangement with your FSA, you may not even have to file the claim (it might get handled automatically for you).

The dependent care plan is even better, as it's usually a lot easier to predict the cost of daycare or geriatric care.

There are other variations known as Health Savings Accounts; Health Reimbursement Accounts; and Medical Savings Accounts.

Spending It Down
As happened to me 2 years ago, I got busy and didn't schedule a couple of dental and doctor's appointments, so I didn't spend much of my account this year.

Rather than simply forfeit the money, I got an eye exam and then got some new prescription glasses (though I still have enough left that I might get a spare pair). I have a grace period through early March to tap last year's account.

As an aside, I had LASIK laser eye surgery over 10 years ago from TLC's Dr. Mark Whitten, who subsequently became best known for performing the surgery on Tiger Woods and some prominent Washington-area athletes including then-Redskins QB Gus Frerotte and former Georgetown Hoya Patrick Ewing.


Unfortunately my guarantee lapsed because I missed a yearly check-up in the fourth year and I'm becoming slightly near-sighted again. But it's still the best thing I've ever done and had my FSA existed then, it would have saved me large amounts of money.

The Bottom Line
Since everyone has at least some predictable expenses such as dental appointments, an FSA is a terrific benefit for virtually anyone because unlike taking a deduction it doesn't have to cross the threshold of 7.5% of your income. If you qualify, the benefit is immediate.

(My plan even allows me to claim expenses that exceed my plan balance early in the year, if my annual allocation via payroll deduction will eventually cover it.)

Further, in a year where you know you'll have large expenses not covered by a plan, such as braces (or Invisalign) the savings are very clear-cut.

The flip side is it may push you to pay for services you might not have gotten otherwise if you badly misjudge the amount you need, but as long as I'm at least breaking even, I figure it's worth it. The services are usually ones I need anyway.