Oct 16 2007

Why a medical flexible spending account will save you money: Part 1

A few months ago, when my husband and I qualified for health insurance under his employer, we received a health care debit card, also known as a flexible spending account. Some plans require you to submit paperwork as if you were requesting a rebate/refund, but ours issued VISA debit cards and also will allow us to request a refund via paperwork.

After tallying up how much money you predict you’ll spend on medical expenses in the coming year, you put the amount in your flexible spending account. Let’s say you chose to put $1,000 in it.

The money comes out of the employee’s salary BEFORE TAXES. $1,000 pre-tax dollars. Yup. So you’d be saving $250 if you are in the 25% tax bracket, according to BankRate’s calculations. And that’s only the beginning.

Because the funds are automatically withdrawn from your paycheck, you don’t miss the money. If you get sick or cut your finger while chopping vegetables, you can go to the doctor and know you already have funds to pay for it, separate from your normal monthly budget.

While it’s difficult to predict all of your family’s medical needs for the coming year (because honestly, how can we know that?) you can start small and assume each family member will visit the dentist twice per year, the eye doctor once, and general practitioner once.

Factor in the co-pays for all of your doctor’s visits and prescriptions, and that should be the minimum amount you put in the flexible spending account. If you can afford it, add an extra cushion. But remember, you won’t get the money back. It’s a spend-or-lose it deal (check your individual plans to be sure of those details).

I’d like you to visit the fellows of Frugalize to read their take on FSA. Their blog is full of fantastic information.

Because this post is getting long, in part 2, I will write about how you can use your unspent FSA funds.

Note: I am NOT an expert on flexible spending accounts! Please be sure to read through all of your FSA literature. And, if you see something in this or the next (or any of my posts, for that matter) that you’d like clarified, please let me know.



2 Responses to “Why a medical flexible spending account will save you money: Part 1”

  1. Quite an interesting post and I couldn’t agree more, having a flexible spending account will definitely save you a lot of money. I didn’t know this before but if you think about it, you’re right. :P ?Thanks.

    Medical Oddities’s last blog post..Liberty Medical Supplies

  2. Medical FSA plans are one of the larger frauds imposed on the american public by the IRS and the plan administrators. They benefit, we lose.

    Consider this:

    1. The IRS is effectively privatizing their audit, with the plan administrators getting 100% of any forfeited amounts. Believe me, in my case they stopped at nothing to ensure funds were forfeited.

    They paid amounts used by the debit card, leaving me to believe I had spent the full amount. Then in late august 2008 they said they needed validation of almost all expenses for 2007, going back 18 months. They could have asked for receipts earlier, but of course they wanted to make it as hard as possible for me to comply by the deadline of September 28th.

    Although I am good at keeping receipts, most medical providers did not provide acceptable receipts, simply charging the debit card. We spent hours contacting the providers, with mostly full co-operation but some were just not able to give the information the FSA administrator would accept.

    Even though we had receipts for expenses well in excess of the $5,000, the administrators would not accept receipts that were not in the original claim for $5,000. I.e. if getting all the required documentation for one expense was proving problematic, we could not replace it with another expense.

    2. Official figures show that only 4% of funds are forfeited. However, consided this. If funds are forfeited, you lose not only the funds but you then have to pay taxes on the forfeited funds (see Wikipedia entry on FSA for an explanation of this). Therefore people go to extraordinary lengths to use up the funds, even if it means buying glasses you don’t need and throwing the glasses away. If you buy glasses and throw them away then you still lose the money but you no longer have to pay taxes on the money. When the cost of this sort of stuff is added to the 4% the forfeit amount will almost certainly exceed the 15% tax bracket and probably the 25% bracket that most of us pay.

    3. If you love being audited then the FSA is for you. You will certainly recieve a very aggresive audit by your plan administrator.

    4. Never consider the dependent care FSA. The paperwork involved in claiming back the money is horrendous. You will have to obtain an employee identification number and complete all sorts of tax forms each time you pay a baby-sitter. It will take almost as long to process these forms as the amount of time the baby-sitter spent baby sitting. The taxes and social security that you will have to pay will exceed any of the supposed tax savings gained from the FSA. You will also be substantially increase the chances that you will be audited by the IRS.

    We have learned the hard way not to touch these FSA plans.

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Hey! I'm Kacie, wife to Shane and mother to Jonathan (7), Vivienne (5) and Amelia (2) . I write about my family's finance: how we save money, improve our spending, and plan for the future.

I hope I can inspire and encourage you to improve your situation. See disclosure.

I'm adopting a much slower-paced posting schedule, and treating this as a hobby blog now.

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