Should I Use My Flex Spending Account (FSA)?

by Mark Wong on May 10, 2010 · 17 comments

in Health, Personal Finance

The answer to this question for most people is undoubtedly YES, regardless of what medical expenses you expect to incur in the upcoming year.

If your health insurance plan offers a Flex Spending Account, or FSA, in addition to your regular health insurance, it’s almost always wise to opt in.  An FSA allows you to pay for your future medical expenses with pre-tax income.  So for example, assuming you are in the 25% tax bracket, this would essentially mean a 25% discount on all of the medical expenses you allocated for.

If I were to allocate $1,500 this year, and spend all of it on medical expenses, at a 25% tax rate my total savings would be $375.

The only catch is you have to estimate your medical expenses for the upcoming year.  FSAs are use it or lose it.  If you allocate the money to be spent on medical expenses and don’t actually incur them, then you lose the money outright.

FSAs act as an advance on your money

When you enroll in an FSA plan, your company automatically deducts a small amount from your paycheck to accumulate to your fully allocated amount.  While it will take the full year for your account to sum up to the pre-defined amount, most FSA plans will reimburse your medical expenses as they occur, not only if you have enough money in your account.  Some plans even give you a credit card in which you can charge up to your pre-defined amount.  For this reason, any medical expenses you incur, above the accumulated paycheck deduction, acts like a cash advance on your money.

Additionally, if you happen to get laid off by your company, any amount you’ve been reimbursed for, that has not been taken out of your paycheck, is yours to keep.  If you’ve made the claim and the money is in your pocket, you do NOT have to pay it back.  A nice thing to know in this type of economy.

Always estimate low for FSAs

Even if you’re single and only doing your preventative exams every year, you’re still going to incur some type of medical expenses for co-pays and prescriptions.  And even if it’s very low, it’s not difficult to at least create a forecast of it.

Remember FSAs are use it or lose it, so it’s always good to guess low on your allocated amount.  If you over estimate, your potential tax discount gains will quickly be wiped out with overestimate losses.

For example, let’s say I allocated $1,000, but only spent $700 for medical expenses.  At a 25% tax rate, I’ve saved $175 already.  But the $300 I didn’t spend is lost at 100%.  Therefore, the net effect from my FSA is actually negative, resulting in a loss of $125.

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