With FSA popularity on the rise, participants want to know ‘what’s the right amount for my flexible spending account?’
Flexible Spending Accounts (FSAs) are fast becoming one of the most popular employer-sponsored benefits in the United States. Currently, about one in five Americans use this tax-reduction tool to save on a wide variety of medical expenses, and the numbers are expected to significantly increase over the next few years.
Why are FSAs so popular?
According to FSAFEDs.com, the official FSA website for federal employees, taking advantage of the pre-tax paycheck deductions afforded by FSAs can reduce annual out-of-pocket medical expenses by 20 to 40 percent. With the cost of medical care continually escalating, that can represent a hefty hunk of change for families looking to stretch their dollars to the utmost.
How FSAs Work
Each year, employees working for companies that offer an FSA must elect to participate and choose how much to contribute. Previously, the maximum contribution was $2,550. In 2017, the limit goes up to $2,600.
Starting the first day of the plan year, the full annual election amount is available to the FSA participant. Over the course of the year, the participant’s pre-tax deductions are spread out equally and set aside each pay period. When participants incur an eligible expense, they submit a claim and get reimbursed by their company’s benefits administrator.
Some vendors allow account holders to set up their FSAs so that common medical expenses – such as a visit to the doctor or a prescription purchase – are automatically sent to the vendor. That way, they don’t have to submit a claim for reimbursement. Once their funds have been exhausted, employees can no longer receive reimbursements until the following plan year.
The only downside to FSAs is the ‘use it or lose it’ rule. With ‘use it or lose it’, plan participants with leftover money at the end of the year cannot carry the funds over to the following year. However, due to recent changes in FSA regulations, some plans/employers now allow employees to roll over up to $500. Other plans allow a grace period of two and half months. However, these options are available only at the employer’s discretion.
Adding Up the Numbers
No matter the FSA plan, even if it allows carryover or has a grace period, employees must consider how much money to put into the account. If they under-spend, they could still end up losing some of their funds.
How much should participants put into the plan?
The idea isn’t to figure out exactly how much to contribute, but instead to aim for a reasonable estimate of anticipated healthcare usage and costs for the upcoming year.
In order to come up with an estimate, account holders should review their current year’s medical care expenses and make a list of what they are likely to need next year. This includes deductibles, co-pays and co-insurance, in addition to regular doctor appointments, urgent care and emergency room visits, prescription costs, and any planned surgeries or procedures. It also includes:
- Dental costs, including orthodontic work
- Vision expenses, including the cost of glasses and contact lenses
- Assistance for disabled people
- Counseling and psychiatric care
- Medical equipment and supplies
- Physical therapy and other treatments
The employer’s healthcare plan document, available through hard copy or on the insurer’s website, can provide useful information when estimating medical costs. For individuals with a major procedure coming up, it can help to contact the insurance provider, who should be able to provide an estimate.
View a list of IRS-approved FSA eligible expenses.
Don’t Expect to Get it Perfect
Most people can track their regular medical expenses with reasonable accuracy. The hard part comes from estimating emergencies and unexpected costs. When estimating these expenses, participants should take into account factors such as their age, general health, and any chronic conditions that could take a turn for the worse; then do the same for all family members.
For those in the ‘use it or lose it’ club, it also helps to pre-plan some expenses for the end of the year to keep from forfeiting any unused money. For example, getting those new glasses they’ve been putting off for a while; replacing a problematic dental filling; or visiting a chiropractor to help relieve that lower back pain that makes it hard to fall asleep.
Account holders who really want to dig in and get it down to the nearest dime can visit FSA-related websites, or search Google for “FSA calculators” to find free, easy-to-use calculators to help with the math. Some calculators even allow users to create a range of estimated annual elections and then determine their tax savings for each one. Nevertheless, participants shouldn’t expect a perfect estimate, as a lot can happen during the course of a year.
To summarize, in order determine ‘what’s the right amount for my Flexible Spending Account’, participants should:
- Know whether they have the option of carrying over unused money
- Track their expenses throughout the year
- Build in a cushion for unexpected medical expenses
- Submit their best estimate
With time and experience, most employees get more accurate each year at estimating their expenses and making better use of their FSA benefit.