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Medical Flexible Spending Accounts

Updated on July 30, 2015

A way to save money on medical bills

Your employer may not offer a health savings account which is by most measures a better deal than a medical flexible spending account which also known as a 125 plan. In a medical flexible spending account you will need to do a little planning. In a medical flexible spending account plan you are allowed to deduct a fixed amount from your salary over the course of a year. These funds can only be spent on qualified medical expenses. Qualified medical expenses are quite diverse and the list is very long but includes items that may surprise you such as special foods, reading glasses, parking and tolls as well at the items one would normally think of such as prescription drugs, dental work, and medical deductibles and co pays.

When you pay into a medical flexible spending account no tax including Social Security and Medicare is deducted. This money is truly tax free. You have until the 15th of March of the following year to spend the money in most plans. Often the participant is given a debit card to charge their purchases. Charges paid for with cash most often are submitted with a claim form and receipts.

Save money on medical bills

How can I best use this plan?

One of the times this becomes most obvious is when you know you will incur expenses in the coming year. A good example would be dependents braces where your expenses could be say 2000 dollars. By deducting the 2000 dollars from your check your cost would be about 1250 dollars saving you 750 dollars. The assumptions made here that you are in the 25 percent federal tax bracket, 5 percent state, and are paying Social Security and Medicare taxes. Your situation will vary.

For most workers a rule of thumb is if you spend 75 percent of this money you will be ahead. In my personal experience I found all of the money I was contributing was spent by August. In our lives most medically necessary items are not expected.

For many plans the leftover money is donated by the employer to charity. The problem with that is it is the employers choice not yours. You may or may not agree with that charity and its principals. In the case of one of my former employers I would have gone out and bought a case of aspirin and flushed them down the toilet before I let the employer donate my hard earned money to a certain charity. In most cases employers choose neutral charities such as the local food bank where I would be very happy donating my excess funds. In some cases the money goes back to the employer to pay for “administering” the plan.

Depending on your circumstances a medical flexible spending account can be a good deal. Savings can be over 2000 dollars. For some people the attention required may not be worth the savings. If you have this plan available and you have known expenses coming such as a crown, braces, or dentures this plan can save you real money.


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    • sandyvoit profile image

      sandyvoit 5 years ago from Kirkland, WA

      For those who are self-employed there is another option - a Health Reimbursement Account (HRA). This is a Section 105 Plan, and an advantage is that you don't have to determine in advance how much you might spend on accepted medical expenses, and you don't have the small limit of only $2500/year. My wife hired me as her business manager and my hiring came with family health care benefits (which covers her as well). Through the National Association for the Self-Employed ( I used an HRA last year and we were able to get reimbursed over $11,000, which reduced my wife's taxable income, and I didn't have to know in advance how much to have deducted from my paycheck.

    • MindyK profile image

      MindyK 7 years ago from Cleveland, OH

      Awesome hub...all the things I'm clueless about. Finally someone to put this stuff in laymen's terms!! Thanks bunches :)

    • artrush73 profile image

      artrush73 7 years ago

      Great Hub, thank you for sharing such useful information. Looking forward reading more of your work.

    • Susan Carter profile image

      Susan Carter 7 years ago

      I generally use my flexible spending account to build up my vacation money for Christmas when I visit my daughter out of state. I don't get sick because I go to a really great chiropractor and I know pretty much how many times in a year that I'm going to get an adjustment. I usually end up fairly close at the end of the year so I just turn in my receipts in November. It's like the old "Christmas Club" plan from years ago. On average I save about $275 in taxes I would owe every year just by having $520 in my flexible spending plan. To me that is a really great trade.

    • eovery profile image

      eovery 7 years ago from MIddle of the Boondocks of Iowa

      These are good, but they seem to force us to pay X amount of money on healthcare no matter what. I would rather have it as a higher deductible, and not pay for it up front, then be forced to use it or lose it.

      Thanks for the hub.

      Keep on hubbing!