How to Estimate a Flexible Spending Account (FSA)
My husband and I love having a flexible spending account. We enjoy it as a benefit offered by his company for employees. While everyone has the potential to deduct health expenses on their taxes, the FSA makes it hassle-free!
The biggest concern with a flexible spending account is that you will lose money at the end of the year. A FSA is only good for one year, and the amount you deposit into the account can only be used in the same calendar year. So, if December 31st comes along and you still have money in your account, you cannot withdraw it or use it - it's gone!
For this reason, it's really important to estimate what your expenses will be throughout the calendar year when setting up your FSA. If you estimate well, you will have the money you need and won't lose any at the end of the year.
What is a Flexible Spending Account (FSA)?
What is Eligible for FSA?
The Internal Revenue Service (IRS) has very specific rules regarding what expenses can be deducted from a Flex Spending Account. In general, any expenses that you incur for medical and dental care can be paid using a FSA. These expenses can include payments made to doctors, dentists, or service centers such as hospitals. They also include prescription costs and lab work. However, as of 2011, expenses for over the counter medications are NOT included. To be sure you are estimating correctly, check the IRS web site for the specific rules. Any changes will be released prior to the calendar year in which they are effective.
Estimating Health Care Expenses
When setting up your Flexible Spending Account, you need to determine how much money you will need to cover health care expenses for the next calendar year. In most cases, you begin setting aside money through payroll deductions in January, and make your final deposit in December. Because the amount must be decided from the start, you need to estimate how much you will need. This can be really difficult...how can you know how often you or your family members will be sick this year?
Obviously, you can't predict exactly how much you will spend on health care in the coming year. But, you can make an educated guess based on several factors. The two primary factors in estimating future health care expenses are past history and insurance coverage.
How Much to Contribute to FSA?
When deciding how much to contribute, first look at your medical and dental insurance policies. Find out how much you pay for doctor visits, prescriptions, dental checkups, and any other medical expenses that you incur on a regular basis. You can also review your past year's Explanation of Benefits paperwork from your insurance companies to find out how much you usually pay for these products and services. It is important to note any changes in your insurance coverage before relying completely on the past year's numbers.
Now that you know approximately how much you spend per prescription, doctor visit, and other items or services you expect to use in the next year, you can estimate how many of each you will need. For example, if you pay a specific amount for a prescription, and you usually fill it once per month, you can estimate the total amount that you will spend on that medicine in the next year. Here is an example:
Estimate of FSA Needs
Product or Service
Number per year (include all family members)
Out of Pocket Cost (after insurance)
Total Cost per Year
Blood Pressure Prescription
Quarterly Lab Tests
Tips for Estimating FSA Contributions
Now that you have a good idea of your routine medical and dental expenses, you have a starting contribution amount. In the above example, you would want to contribute a total of $640 to your FSA for use in the next year.
You may want to increase your contribution above that amount for several reasons. Do you anticipate an increase in your medical or dental expenses in the next year? Are you going to have a baby? Do you have an operation or procedure planned? Or, will you have a child in braces in the next year? Any of these items may make you increase your contribution above the original estimate.
However, keep in mind that you lose any money that you don't use by the end of the year, so be careful not to increase your contribution too much. Do your homework first and find out approximately how much these additional charges will be, then decide if you are comfortable adding them in. My husband and I are more comfortable estimating a bit low so that we are sure we don't lose any money. I would rather run out of FSA funds before the end of the year than throw money away. But how you plan your contribution is ultimately about a combination of good planning and your comfort level with the risk of losing some money.
A little bit of planning goes a long way with estimating a flexible spending account contribution!