Save Money with a Healthcare Flexible Spending Account (FSA)
Many employers allow employees to set aside money in a Healthcare Flexible Spending Account (FSA), which is a reimbursement account where you set aside pre-tax dollars to pay for eligible healthcare expenses not covered by health insurance. The money you contribute to an FSA is deducted from your paycheck before it's taxed, saving you the amount that would have been taxed. You’re going to spend money on healthcare anyway – you may as well take advantage of the FSA.
Many employers allow employees to see aside money in a Healthcare Flexible Spending Account (FSA), which is a reimbursement account where you set aside pre-tax dollars to pay for eligible healthcare expenses not covered by health insurance. The money you contribute to an FSA is deducted from your paycheck before it's taxed, saving you the amount that would have been taxed. You’re going to spend money on healthcare anyway – you may as well take advantage of the FSA.
How FSAs Work
At the beginning of the enrollment period (usually in the fall for most companies) you estimate how much money you’ll spend on eligible expenses throughout the year. Using this figure you decide how much money to be deducted from your paycheck each pay period. (Although there are no legal limits to how much you can set aside, your employer will probably designate a maximum amount.)
This money goes into a healthcare FSA. Some employers provide a debit card, which you can access this money, while others require you to submit receipts and get reimbursed by check or electronic deposit. If you can afford to hold off on the reimbursements, it’s easiest to turn in all receipts at the end of the year.
One nice feature is that you can actually withdraw the full amount of your entire contributions at any time during the year should you need to. Of course, if you leave the employer before the year ends, you’ll have to settle up!
The big catch is that you have to use all your healthcare FSA money by the end of the plan year. Any money left in your account will be forfeited. But if you overestimated your expenses for a given year, it’s pretty easy to use up the amount in December on over the counter medications – or a single pair of glasses!
Expenses Covered by a Healthcare Flexible Spending Account
Eligible expenses under an FSA include many healthcare expenses that are not paid for by health insurance. Some examples of FSA-eligible expenses are:
- Medical and dental deductibles and co-payments
- Eye exams, contact lenses, and glasses
- Prescription drug co-payments and co-insurance
- Over-the-counter (OTC) products
- Orthodontia or other dental care
- Physical therapy
- Chiropractic care
- Hearing aids
- Smoking cessation
Your employer should be able to provide a complete list. Even mileage is covered by some plans. You may be able to deduct mileage to and from the pharmacy to pick up prescriptions.
Benefit of an FSA Over a Medical Tax Deduction
While medical expenses can by claimed as deductions on your tax return, it’s only beneficial if your medical and/or dental expenses not covered by health insurance exceed 7.5% of your Adjusted Gross Income. This is usually too high a threshold for most people to benefit from this deduction. If your adjusted gross income is $40,000, you’d only be able to deduct those uninsured medical/dental expenses in excess of $3,000 from your income taxes. So even if you had $5,000 of expenses, only $2,000 of that is deductible.
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