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How to maximize the value of flexible spending accounts

Dec 14, 2018
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Be sure to document your medication expenses.
Joe Raedle/Getty Images

Somewhere between 33 million and 38 million Americans have what are called flexible spending accounts. This is an arrangement where you have your employer set aside a chunk of your paycheck (up to $2,700 in 2019 — the average amount is $1,200, according to the Employment Benefits Research Institute) that you don’t have to pay taxes on, and you can then use that money to pay for certain things —  usually medical expenses.  It’s a way to save money. 

There’s a catch: You have to document everything you buy with receipts and prescriptions for medications (even over the counter ones), and if you haven’t spent it all by the end of the year, you may lose that money. Some employers allow up to $500 to roll over, others give a two and a half month grace period, some do neither.  About 8 percent of FSA holders end up leaving money in their accounts at the end of the year. The average amount is $172, according to WageWorks, a firm that administers FSAs and a lot of other benefits.

Here are some answers to common questions and some tips for making the most out of your FSA.

What happens to the money that I don’t use?  

“It goes back to your employer,” explained Paul Fronstin, director of the Health Research and Education Program at the Employee Benefit Research Institute. “It’s there’s to keep, and they use it to offset any losses.” 

And there can well be losses to an employer. When you sign up for an FSA and you tell your employer to take out, say, $1,200 from your paycheck over the year, the employer has to make all of that available to you on Day One of the new year, before a cent has actually been taken out of your paycheck.

“I could, say, get LASIK surgery on Jan. 2, submit the receipt on Jan. 3, get reimbursed on the 4th and quit my job on the 5th. If that happens, then my employer is out $1,200.”

The leftover money can also be used to pay for the administration of the plan.  

How do I figure how much money my employer will need to take out of my paycheck for the FSA?

“When you’re looking at a flexible spending account, the best thing to do is look at your past experience,” said Jody Dietel, chief compliance officer at WageWorks.

How much did you spend last year on copays and prescription medicine? Do you have any big expenses you know are coming? If you know you go to the dentist twice a year and the doctor three times a year, you can budget out your copays, for example, and use that as a guide for what you can direct to your FSA.

What can I use my FSA for?

“Medical expenses for an employee, the employee’s spouse and the employee’s dependent children that are primarily for a medical purpose and not covered by insurance or another plan,” according to the Society for Human Resources Management. 

Examples of things you can use your FSA for: Copays, deductible payments, eyeglasses, hearing devices, prescription drugs, psychiatric care, emergency ambulance services. You can spend your FSA money on over-the-counter drugs only if your doctor has written you a prescription for them. You could, for example, get a prescription from your doctor from cold medicine in advance of cold season.

Examples of things you cannot use your FSA for: Insurance premiums. “Expenses that simply benefit an individual’s health, such as a vacation, are not eligible for reimbursement unless a physician has indicated that the expense is necessary to treat or relieve a specific physical or mental illness,” says SHRM. You can’t use it on cosmetic procedures (except to cure a deformity or congenital abnormality). 

Whatever you use it on, save the receipts and prescriptions. You may need to send them in. Those receipts can be a pain to keep track of, though some employers offer apps that can make it easier. 

Rules change from year to year sometimes, so check ahead what is and isn’t allowed.

What if I don’t use every last cent of my money?

It’s OK. Many employers allow you to carry $500 over to your next year, or they offer a grace period through March 15. But even then, remember, you don’t have to spend all of it to still be saving money. If your FSA money hadn’t been taken out of your paycheck tax free, you would have ended up paying federal, state and local taxes on it. As an example, let’s say your tax rate is 25 percent and you set aside $1,000 in your FSA. Well, if you had never set that money aside, you would only have seen $750 of it after taxes. So if you spend $750 out of your $1,000 FSA, you’re breaking even. You can fail to spend all of your FSA and still come out ahead.

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