Your employer’s benefits package may include a lot more than health insurance, and you may not want to take advantage of each offering. Case in point: the flexible spending account, or FSA.
Whether it’s open enrollment or you’re starting work at a new company that offers an FSA, you’ll want to know what it is and how to use it before you sign up. Depending on the extent of your health costs, an FSA can help you save a lot of money on care. But if you contribute more than you’ll need to spend on medical care this year, an FSA can backfire: Any unused funds will disappear.
Here’s more on what FSAs are, whether you should get one and how to use one wisely.
What is a flexible spending account?
Also called a flexible spending arrangement, an FSA (not to be confused with an HSA) can be used for medical expenses, dental care and vision care. The amount you decide to contribute to the account for the year is deducted from your salary before income taxes. This reduces your taxable income, saving you money on taxes. Depending on your benefit plan, your employer may contribute to your FSA as well.
You will either have a debit card to pay for medical expenses as you go, or you’ll have to submit receipts and documentation for reimbursement. You can use your FSA for your own medical expenses, or expenses incurred by your spouse or any dependents you claim on your taxes. You can also use FSA funds for any adult children on your health plan that will be 26 or younger on Dec. 31.
Unless you have an ongoing medical condition, some experts say flexible spending accounts may not be the best use of your paycheck. “With most young, healthy folks with decent benefits, out-of-pocket expenses would be pretty low,” says Greg Szymanski, director of human resources at Geonerco Management in Seattle. “I’d recommend they take full advantage of something like retirement savings. If you’re healthy, an FSA doesn’t seem worth the effort.”
Other experts say an FSA is useful for people with any level of health costs. “It’s the simplest and easiest way to give yourself a raise,” says Kevin Haney, owner of A.S.K. Benefit Solutions, a New York agency specializing in the sale of voluntary employee benefit programs. “Almost everybody has some level of predictable, ongoing, unreimbursed medical expenses. Pre-tax dollars just go further than after-tax dollars. It’s putting money in your pocket.”
To decide if an FSA is right for you, take stock of your health. If you have any ongoing or expected medical needs you might need to pay for in the upcoming year, an FSA is a great use of your money. If you can’t think of ways you’d use the account, then you probably don’t need one.
How to use an FSA
While you can’t use your FSA for insurance premiums, you can use it for copayments, coinsurance, deductibles, prescription medications, and dental and vision care, according to the IRS.
FSAs can also be used toward medical equipment and treatments such as:
- Medicines prescribed by a doctor.
- Blood sugar testing supplies.
- Birth control.
- Breast pumps.
- Pregnancy tests.
- Psychological treatment.
- Smoking cessation programs.
You can’t use your FSA to pay for gym memberships, over-the-counter drugs without a prescription, vitamins or cosmetic procedures. In some instances, such as smoking cessation or diet counseling, you may need a doctor’s referral to prove you really need the covered treatment. For a full list of covered treatments and rules, check the IRS document on approved medical expenses.
Determine your annual contribution
During open enrollment, you decide how much you plan to allocate to your FSA. You can contribute up to $2,550 in 2016, but you can only adjust your amount during open enrollment.
If it’s your first job, you’ll have to make some predictions. Read through your employer-offered health care plan carefully to learn about the cost of copays. If you have any underlying conditions, such as asthma or diabetes, factor in how much you’ll pay for your medications. Then consider your other needs as well. For example, you could use funds for dental or vision care (including copays).
FSAs are “use-or-lose,” meaning the amount in your account will expire at the end of the year. However, employers do have two options to prevent employees from losing any funds remaining at year’s end: carry over funds or apply a grace period. The first option lets you carry over up to $500 to the next year. The second option offers a grace period for 2.5 months to spend any leftover funds. Employers can offer either option, but not both.
The bottom line
There’s no one-size-fits-all when it comes to flexible savings accounts. To decide if one is right for you, forecast upcoming health and related expenses for the year and become familiar with the FSA plan being offered.
“You have to read your company’s plan to know what you’re getting into because it may be more restrictive than the IRS is,” says Coleen Pantalone, personal finance expert and professor of finance at Northeastern University D’Amore-McKim School of Business in Boston. “Take the time to understand it, and seek out help if you need it.”