Are FSA's worth doing?

Posted By Paul

Now is the time of year where many companies have you decide if you want to sign up for an FSA account. Since I've been thinking about FSA's recently I thought I would do a quick posting on my experiences with them.

First a quick description of FSA's.

Note:

I'm going to focus on medical FSA's because that is what I know about. There are also FSA accounts used for dependent care, but I've never set up one of those because I don't have kids.

A Flexible Spending Account is an account that generally works like this:

1) You decide how much money you want to put into the account for the next year.

2) During that year money is taken out of your paycheck and deposited into your account. The money that goes into the FSA account is not taxed. (So if you decide to put $1200 into your account $100 comes out of your pay pre-tax each month)

3) You can use the money in the account for certain expenses. The set of allowed expenses is defined by the IRS but generally comes down to costs you have to pay for medical or dental care.

This includes stuff like:

*Doctor Co-Pays

*Fees that your insurance doesn't cover (like if you got a teeth cleaning and your insurance only pays for half of the costs, you can FSA the other half)

*Some medical or dental procedures that your insurance won't cover (like Lasik)

*Medicines (prescription or over the counter)

*Eye glasses (even prescription sunglasses)

So how do you get the money OUT of your account? The way it usually works is a system where you pay the costs yourself and then you submit the proof of payment documentation to the benefits company and they send you a check from your FSA account as reimbursement (once they have approved that the expense qualifies). Most companies that have FSA systems have web pages that makes it easy to submit claims and check your remaining balance.

So what's cool about this? It can be a huge savings since you're not paying taxes on the money used for your FSA account.

The tricky parts with FSA accounts are:

1. Generally any money you don't use up by the end of the year is lost (so you don't want to put $1000 into your FSA and then only use $100 over the year, because you'll lose the remaining $900).

2. The rules for what is allowed and what isn't can be complicated and sometimes odd. The general rule is that for the expense to be allowed it has to relate to treating a disease or injury. So bandages are allowed, but vitamins generally aren't. Tylenol is allowed, but aspirin isn't (because it can be used daily to prevent heart disease). Some expenses are allowed only if a Doctor prescribes them (like massage therapy).

3. It takes a little extra paperwork.

So do I suggest getting an FSA? I've had one for several years now and it has worked well for us. The main thing I've learned is that you should definitely set up your FSA to cover your KNOWN expenses for the upcoming year. You can try to predict your medical needs for the upcoming year but that is of course very difficult to do.

My first year in an FSA I overestimated my medical costs so I ended up with $200 extra at the end of the year. I ended up going to the pharmacy and stocking up on bandages, cold medicine, all sorts of things. It worked fine in that I was able to use the $200 but you definitely don't want a big surplus every year (you can only have so many band-aids in your closet before it starts to get ridiculous).

The following year we tried to eliminate the surplus by dropping our FSA amount by $200 and that has worked well for us as a base amount where we end up either using it all or having very little (less than $15) left over at the end of the year (and we use that extra $15 or so to restock our medicine cabinet).

The base amount gets tweaked a little from year to year. For example, my dentist had been suggesting that I get some fillings replaced so one year I added the cost in to the base FSA amount and had it done that year (you can ask your dentist for the codes for the procedures and then just call your dental insurance to find out how much of the cost will be covered). Also my wife and I both wear glasses so when either one of us plans to get new glasses in the upcoming year we'll add some extra for that.

If you're new to FSA I suggest doing something very simple like:

Take the cost of your family's prescription medication for the year, add the out of pocket cost for a dental check up for everyone in the family, and use that as your FSA amount and see how it works out. If you end up with a lot of extra, use the money to stock your medicine cabinet and then lower it for the following year. If you end up running out of FSA money early then you can decide if you want to raise it a bit the next year. Once you know your standard FSA eligible costs for a normal year then it's easy to tweak it up or down from year to year as the health needs of your family evolve.