How to Use Your Flexible Savings Account to Save Money and Avoid Losing Benefits
It’s that time of year again: open your employer benefits enrollment season, which, if you’re lucky, includes a Flexible Spending Account (FSA). If around this time you always said to yourself, “I really should use my FSA,” but you never did, now is the time to correct this financial mistake. Getting an FSA is like getting a 30% discount on medical and dependent care (free money, folks!). There are some serious mistakes to be aware of, but don’t worry, we’ll help you avoid them.
Why you should use / care about FSA
Two words: big savings. Depending on your expenses and your tax category, you could save hundreds – even thousands – of dollars on things like dental services and prescriptions, as well as something we usually never rest in (and don’t pay for): care caring for children and caring for other dependents.
How much can you save?
The FSAFEDs , the FSA’s official website for US federal employees, says the FSA can save you an average of 30% in out-of-pocket medical expenses. This is because the FSA is reducing the taxes you have to pay each year.
Obviously, the higher your health and childcare costs and the higher your tax bracket, the higher your potential savings. But even if you’re a super-healthy single person with only $ 50 in medical and dental expenses, you’re going to come out $ 216 up front. Not too shabby.
How do they work?
Basically, the FSA allows you to set aside money for medical and dependent care costs that you think you will have in the next year. The money is paid out of your paycheck before taxes, which translates into big savings.
You only have a few weeks each year to sign up for FSA Medical or Dependent Care through your employer’s benefits program. The exact start and end date of the registration period varies – please note the mail notification or message from your HR department.
Not sure if your company offers FSA? Chances are, if your company has at least 50 employees, it is because companies are getting tax savings by offering the FSA option.
Within a couple of weeks of enrollment, you should decide how much you think you will need to cover your medical and dependent care costs for the next year – so be prepared to wear your assessment (or psychic) hat. This is the tricky part, but we have a few tips below for determining the correct FSA budget.
Many plans require you to set aside at least $ 250 for next year. But the most you can set aside is $ 2,750 for the FSA for Health and $ 5,000 for the FSA for Dependent Care, no matter how many people in your household.
After you sign up in the fall, the money you put aside will be distributed over the next year, starting in January, and automatically deducted from each paycheck. You have 14.5 months, thanks to a 2.5 month grace period, to use the money in your FSA accounts (in other words, you have until March 15 of next year.
One interesting feature is that even if the FSA’s contributions are not currently sufficient to cover the costs, you can still get a refund if your election sum for the year is enough to cover the costs. So, for example, if you have a large $ 3,000 medical bill in February but only $ 50 has been deducted so far, you can still apply for a full bill in February.
What’s the catch?
The FSA has a big problem: Any money you don’t spend in a year is forfeited, which makes FSA registration a bit tricky and is the reason many people shy away from it. You want to save enough to cover all or most of your eligible expenses in order to get the most tax savings, but you also don’t want to save too much and end up losing what you set aside.
Another challenge is deciding whether to opt for the FSA or take a tax credit on your expenses. IRS offers a tax rebate of care for children in the amount of up to 35% from 20% on the costs of childcare up to $ 3,000 (up to $ 6,000 for two or more children). In some cases, you may be eligible for both a loan and an FSA dependent care provider, but you should not be claiming the same costs for both. To find out what to do, you will need to run some numbers.
How can you save money with the FSA?
Okay, so what qualifies as eligible medical and dependent care costs? An awful lot, but as is usually the case with tax breaks, the many rules and exceptions only add to the confusion.
Eligibility for FSA Dependent Assistance
The most important rule to be eligible for FSA dependency care is that you and your spouse have a paid job; The FSA is dedicated to helping people with work-related dependency care costs. A dependent can be any child under the age of 13 or any dependent you list on your tax return who lives with you and cannot take care of himself (including parents, siblings). Kindergartens and summer camps are examples of eligible costs; nanny at night (when you are not working) and kindergarten – no.
Eligibility for the FSA Healthcare Program
The right to health care costs is more complex. Common costs you can pay with Health Care FSA include: medical and dental co-payments, prescription drugs, glasses and vision exams, and orthodontics. Certain OTC products such as bandages and condoms are also eligible.
You will want to check your company’s FSA brochure to check eligible costs, but this list will help you understand how you can use your funds.
As you can see, you can get tax breaks for some unexpected health expenses, including acupuncture, sunscreen, and first aid kits.
How to determine how much to invest in your FSA
Use the FSA calculator
The easiest way to figure out how much to set aside is to use a calculator like the FSA calculator from WageWorks or this one from FSAFeds. This tool can help you figure out what expenses you expect to incur and how much you can save with the FSA. He asks how many doctor visits you plan to get, how many monthly prescriptions you need to fill out, and so on.
Look at previous health costs
Many people look back at their medical expenses this year and use them as an amount in their calculations. While this is a good start, you need to decide what expenses will actually apply in the next year and what new expenses you may have; You may not get new glasses, for example, because you just have a pair, or you want to have laser eye surgery next year.
Go to your doctor
For expert opinion, talk to your dentist and doctors right now before making an appointment. With your new full checkup, your doctors can help you plan any routine care you can budget for. If you need a new crown for a tooth or anything else expensive, now is the time to find out.
Choice of FSA Dependent Care or Child Care Loan
Deciding how much to invest in an FSA for dependents is fairly easy as the costs are fairly predictable. However, if you are not sure whether to take a tax credit for child care or FSA dependent care, or a combination thereof, take note of these tips from Babycenter : the more you earn, the more FSA – the best choice, especially if you re above the 25 percent federal tax bracket. If your cost of caring for a dependent is at least $ 3,000 and you fall into the 15 percent tax bracket, you might also be best off with the FSA.
For your estimate, make sure you factor in the costs of extracurricular services and summer camp, if applicable.
Finally, in both the FSA’s Healthcare and Dependent Survey, use caution to make sure you are not over budgeting.
Now your turn. Any of your own tips for getting the most out of the FSA? Share them with us in the comments.
This post was originally published in 2011 and was updated on 11/25/2019 to include more recent information.