Flexible Spending Accounts will save you money
Mrs. KMC just started a new job and as part of the usual new job hassles, she had to sign up for benefits. We decided to keep my health and dental, but she also had the opportunity to take advantage of Flexible Spending Accounts (FSAs).
Flexible Spending Accounts
FSAs are great. If your employer offers them, take advantage of them. Here’s how they work. The company takes money out of your paycheck pretax (in the amount you designate, of course) for health care spending and dependent care. Later, you file for reimbursement of a covered expense and get a check.
How they work
We pay $800 per month for our daughter to attend daycare, so this is an opportunity to save money. You can have them deduct up to $5000 before tax. You just get your daycare provider to verify you spent the money with them (they provide tax ID and a signature), fax the form in, and get money back. My work also does this and even deposits the money into our checking account electronically. Pretty sweet.
Important note: the total amount you can put into an FSA is $5,000 for the household. If both spouses have access to the plan, the total must be $5,000 or less for the year.
The health care version works similarly. Fill out form. Provide receipts. Fax form in. Get money.
The beauty part is that since the deduction comes out pretax, your out-of-pocket dependent and health care expenses aren’t costing you quite as much as they normally would. In other words, our $800/month daycare bill is costing us somewhat less than that in point of fact.
There is, of course, a catch. Because you have to determine at the beginning of the benefits year how much you want deducted over the course of the year, you may get the deduction wrong. If you have too little deducted compared to your actual expenses, no big deal. But if you have significantly more deducted than you actually spent, you’re in trouble because FSAs work on a ‘use-it-or-lose-it’ basis. If you don’t accrue expenses up to your deduction amount, you lose the remainder. However, don’t confuse accruing the expenses with filing for reimbursement. You’re typically allowed to file for reimbursement for a few months after the calendar year end (company policies vary). You shouldn’t be too worried about this, though, because you’d be amazed at what you can file for reimbursement. Over-the-counter drugs, glasses, Lamaze classes, rehab - they’re all covered (again, check your plan specifics).
One last thing to note about FSAs. You can typically change your deductions only under certain circumstances. For example, if your spouse loses his job, you can make changes. These ‘life events’ vary by plan.
March 25th, 2007 at 10:56 pm
My wife’s and my employer offers an FSA, but they also offer what we eventually decided to use — an HSA.
Unlike the FSA, unused contributions to an HSA do roll over to the next year. We can contribute up to $1200 per year pre-tax, and that money remains tax free on withdrawal so long as it is used for a health related expense.
“health related” is defined very broadly. For example prescription sunglasses or Lasik both count.
The HSA is coupled with a high-deductible health plan, where we pay 100% of the first $1200 after which insurance covers nearly 100% of the remainder (depending on the specific expense).
Since I rarely see a doctor, my entire balance rolls over each year. Once the HSA account has more than $3000, we are permitted to invest in mutual funds. Further, since the account is attached to the individual rather than the employer, if we leave our jobs the account moves with us.
August 28th, 2007 at 8:30 am
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