Are flexible spending accounts a good idea?
One of the common perks of corporate America is having the option to contribute a part of your pre-tax paycheck to a flexible spending account. Companies offer this little bonus to employees who want to ease the financial burden of co-pays, high deductibles, uncovered medical treatments and expenses. A flexible spending account is an often overlooked benefit that helps manage a large sum of medical cost, often around $2,000 per year. Nonetheless, there are both advantages and disadvantages to using an FSA.
The tax free advantage
Jump at the chance to pay medical expenses tax-free! Healthcare and dependent care expenses, transit and parking (that are medical necessities like handicap van taxis) are all examples of costs that can be reimbursed under a flexible spending account. View an FSA as a discount on all things medical, like dental and vision care, prescription and over-the-counter medications, co-pays and un-reimbursed medical treatments including acupuncture and massage if prescribed by a doctor.
Emergency and high-cost advantages
If you are concerned about having an emergency or an expensive procedure, a flexible spending account pads your pocket. This piece of mind means lower, if not no medical payment when the flexible spending account card or reimbursement form is used. If you can plan ahead, do just that and sign up for the company FSA.
Tax bracket advantage
Contributing to a flexible spending account means setting aside a portion of money from each paycheck before taxes are removed. So, depending on your income level and the amount of money that you have elected to submit to an FSA, these pre-tax dollars can actually lower your tax bracket, which adds up to an even bigger tax savings.
The biggest disadvantage
Regardless of whether the FSA is set to start and end by calendar or fiscal year, all monies not spent by the deadline will be lost. It is important to find out if your company closes flexible spending accounts by the calendar year. More specifically, at midnight on December 31st, or by fiscal year end, the IRS allots companies the use of a two and a half month FSA cut-off or “grace period” so companies can focus more attention on end of year business expenses.
Childcare disadvantage
If you typically qualify for the Childcare Credit on annual taxes, you need to find out if this is a better deal than the savings you would get from the FSA as using the FSA will disqualify you from receiving the tax credit. Low income and lower-middle income families should check on this as the flexible spending account savings tend to not add up to the Child Care Credit for them.
Limit disadvantage
Unfortunately for those with high medical expenses, there is a cap on flexible spending accounts. They vary by company, but a $2,000 limit per individual not claiming a dependent is fairly common. Sometimes even less, like just $500, is the maximum amount that one can contribute to an FSA. Always check so you can plan accordingly.
Paperwork hassle
There are so many professionals who simply do not have the time to submit receipts via fax or mail. Some flexible spending accounts have debit cards associated with the account, but remembering to use the card, what qualifying expenses can be used, etc. can be a hassle, especially is the savings from the FSA are not very much.
To find out if using a flexible spending account is right for you, evaluate your medical needs and costs. The future might not be predictable, but if you make a budget of your previous year’s expenses and your expected routine medical care needs, you can at least consider if a FSA will work for you. If you’re still on the fence and have no dependents, try signing up for a FSA with a low limit. This way, you test the situation without the threat of losing any real money. Besides, you can always stock up on medical supplies and medication with the left over money.
