Get the Most from Your Flexible Spending Account
Flexible spending accounts were created as part of the Internal Revenue Code Section 125, which allows employees to pay for benefits with pretax income.
To help you get the biggest bang for your benefit bucks, we asked Sanicola to answer some frequently asked questions about FSAs:
Monster: How do flexible benefits work?
Sanicola: There are two types of health FSAs: medical FSAs and dependent FSAs.
With the medical FSA, each calendar year you set aside money to cover your FSA-eligible medical, dental and vision out-of-pocket costs that are typically not covered by insurance. The employer takes the set-aside money out of your paycheck over the course of the year on a pretax basis and then uses it to reimburse you for your out-of-pocket eligible expenses.
The employer limits how much you can put into a medical flexible spending account. The average is $2,500 to $5,000.
If you tell your employer to put away $2,400 and in January have a $2,400 qualified FSA expense, the program requires that you be reimbursed for the total amount, even though you have probably only put one-twelfth of that $2,400, or $200, into the account. At the end of January, if you decide to terminate employment, the employer cannot recover the remaining $2,200 from you.
On the dependent-care side, it's a little different. That has a maximum annual allocation of $5,000 set by the federal government. That's often not enough to cover child-care expenses, so individual employees may also be allowed a portion of a tax credit. In some cases, it might be better for an individual not to participate in the dependent FSA and just take the allowable tax credit. Talk to your tax advisor to see which is better for you; it usually depends on your income level.
The annual amount you choose to place into your dependent-care account is divided among your paychecks for the calendar year, and you can get reimbursed only up to the amount that's been deducted from your paycheck.
You have to outlay the cash to your daycare provider and file for reimbursement up to the amount taken out of your paycheck thus far. Paying for daycare and then waiting for FSA claims to be paid can be a hardship for some people, and the child-care provider has to meet certain requirements. You may also be able to use the program for a dependent adult child or parent.
Monster: Is there anyone who shouldn't participate in a flexible health spending account?
Sanicola: There may be a problem with the most common health FSA, called a premium-only plan, in which you pay a portion of your health insurance premiums via payroll deduction with pretax dollars.
If you're close to retirement age and paying a large health insurance premium, you might be concerned about how reducing your income would affect your Social Security benefit. If you're within two or three years of retirement, get advice on whether you should take a pretax salary reduction.
Monster: What do people mean when they say flexible spending accounts are "use it or lose it"?
Sanicola: You make an annual election for what you think you will spend, and if by the end of next year, you haven't incurred those expenses, you don't get that money back.
You can only make changes to your elected amount if you have a "qualified family status" or life change, such as the birth or adoption of a child, divorce, death of a spouse, marriage, going part-time or full-time, or your spouse's coverage changes.
Barring those life events, you are locked into your election. If you say you're going to spend $4,000 and you spend only $3,000, you lose the remaining $1,000 that you had deducted from your salary.
Monster: Where does that leftover money go?
Sanicola: The employer is allowed to use it to offset administrative expenses.
Monster: How do I make sure I'm choosing the right amount to put into my flexible spending account?
Sanicola: Make a list and figure out a number you're sure you're going to incur as a family, taking into account the range of qualified expenditures, including medication, copays, eyeglasses and contacts. Be sure to consider any insurance or flexible spending account your spouse has.
Monster: What happens if I don't file for expense reimbursement by December 31?
Sanicola: The FSA rules typically give you 90 days from the end of the calendar year to file a claim. You have to incur the claim during the calendar year.
Monster: Any other advice?
Sanicola: Remember to make a new election each year. Whatever election you make in one year does not roll over, even if you want to set aside the same amount.