Pros and Cons of Flexible Spending Accounts
Eileen St. Pierre, The Everyday Financial Planner
My brother-in-law Anthony gave me the topic for this week’s blog post. He and my sister regularly contribute to their Flexible Spending Accounts (FSAs) at work. Let’s just say Anthony had a recent laser tag accident and his FSA really came in handy.
What is a FSA?
A FSA is a benefit offered by your employer, which allows you to put aside money before taxes to cover healthcare expenses like deductibles, co-payments, and coinsurance. While you are not allowed to use them to pay for health insurance premiums, you can use them to cover prescription drug costs and over-the-counter medicine for which you need a doctor’s prescription.
You do not pay taxes on this money. You are limited to $2,550 (2016) per year per employer, but if both spouses have this benefit, that’s $5,100 you can shield from income taxes along with your other deductible employee benefits like 401(k) contributions and health insurance premiums. Other benefits include:
- Contributions are made through automatic payroll deductions – if you don’t see the money, you don’t miss it.
- Your employer may also contribute to it, but is not required to under law.
- There are also FSAs that cover dependent care expenses, such as child care costs and caring for an elderly or disabled family member. These are separate from health care FSAs. Use this type of FSA as an alternative to claiming the child and dependent care tax credit .
The biggest con is that you will lose this money at the end of the year if you do not use it. Your company may offer a grace period up to 2 ½ months to use the money or allow you to carry over up to $500 to use in the next year. Check with your benefits department.
- If you lose the money in your FSA, it goes back to your employer.
- Your employer must use the forfeited money to run the program.
- You need to decide if the benefits outweigh the risk. Personally, my husband and I never had a lot of predictable medical bills to justify opening one through my old employer. Anthony tells me that technology has advanced quite a bit so submitting receipts has gotten a lot more user-friendly.
- This Q&A column from Money has more information.
Other cons include:
- There are limits on what expenses qualify for reimbursement. Sorry, but vitamins and Benadryl no longer qualify. See IRS Publication 502.
- Let’s face it. Some people just aren’t that organized. They may forget to submit their receipts for reimbursement. If you end up losing money every year, it’s not worth it to you to open a FSA.
- Contributing the maximum to a FSA should not lull you into a false sense of security regarding your emergency savings fund. You may need to stash away much more than $2,550 to cover an emergency room visit to the hospital.
FSAs are not the same as Health Care Savings Accounts (HSAs).
In order to open a HSA, you need to be enrolled in a high-deductible health insurance plan. Unlike a FSA, an HSA never expires. There is no “use it or lose it” requirement. The money in it grows tax-deferred so it can serve as an extra retirement plan. If you use the funds for medical expenses, the withdrawals are tax-free. Read more at Kiplinger.
For more information on FSAs and HSAs, see IRS Publication 969.