In and outs of the FSA - The Broke Professional

In and outs of the FSA

2014 is upon us and it brings with it a sea of change in the US healthcare system.  There are new plans and acronyms being thrown all over the place.  From the ACA (Affordable Care Act), HDHP’s (High Deductible Health Plans) to healthcare.gov (website that didn’t work), there are plenty of new terms to confuse even the most literate of people.  Some people got brand new health plans because their original one was cancelled.  Some stayed with their original plan only to see higher premiums.  Pretty much everyone’s health insurance situation changed a little bit this year so it’s vital to at least have a general understanding of the new landscape.

One healthcare acronym that I’d like to focus on that has been around for a few years is the FSA (Flexible Spending Account or Arrangement).  The FSA is an employer sponsored account which is not for everybody, but has some pretty cool benefits if it fits your situation.  It is completely voluntary, and it allows a predetermined (by you) amount of your money to be taken from each paycheck and contributed to the account.  The funds in the account are tax free, which is the main benefit of this account.  If you happen to be in the 33% tax bracket, that essentially gives you a 33% discount on healthcare expenses paid from your FSA.  Very hard to beat savings of that level.

There are, of course, plenty of catches and rules to look for.  There are only certain things that are eligible to be paid for by an FSA.  A complete list can be found on irs.gov, but the most common expenses are doctor or hospital co-pays, medications and dental visits.  Some other helpful things which are right up my alley include the costs of contact lenses, glasses and eye surgeries (including LASIK).  Certain over the counter medications can be covered as well as long as you have a prescription for them from your doctor.  There can be some paperwork needed to verify certain purchases, but that usually just involves emailing or faxing an itemized receipt.  As long as you stick to the list from the IRS, you should find plenty of eligible items.

A major limitation of the FSA is the “use it or lose it” nature of the account.  That is, if you choose to elect $2,500 (which is the maximum amount for 2014) to be contributed to your account but only end up spending $1,500 for the year, you lose that remaining $1,000.  It just disappears.  Probably into some government entities’ account.  Some employers now allow you to carry up to $500 into the next year, but you still lose it if you don’t spend it all by the specified period.  Not all employees offer this, so let’s just assume you have a year to spend everything.

This means if you decide to max out your FSA, you really need to plan ahead.  If you have a big family that spends a lot every year on glasses, contacts, the dentist etc, maxing out your FSA makes a lot of sense.  If you’re a single guy who is relatively healthy and doesn’t go to the doctor much, maxing out your FSA may not be the best use of your money.  Some other situations where it would make sense to go all in on your FSA would be if you have any planned upcoming medical procedures or events, such as the birth of a child or LASIK surgery.  These procedures can easily go into the thousands of dollars, so using $2,500 of FSA money for that would be a great move.  Assess your situation and see how much FSA money would be right for you.

Another limitation with the FSA is that it can only pay for things which were done in that same year.  So if you elect to start an FSA for 2014, you can’t use that money to pay for a hospital visit which was on December 31,2013.  I learned this the hard way as my son decided to be born in late 2012 rather than early 2013.  In any case, this is worth considering as some people believe that you can use FSA money to pay for last year’s medical bills.  You can’t.

Finally, there is a sort of new account on the block called a Health Savings Account (HSA).  It is pretty similar to the FSA in that you contribute your pre-tax money to be used for eligible healthcare expenses.  The biggest difference is that the HSA money is your property, so you can keep it even if you switch employers or don’t touch your funds at all.  It rolls over year after year.  Some even allow you to invest those funds or at least earn some interest on them, which is not a feature of the FSA.  Also, the maximum contribution is much higher ($6,550 for 2014) than the FSA.  Many employers offer both, so you should take your time deciding which one is right for you.  Be on the lookout for a future post detailing HSA’s.

Those are essentially the main features of the FSA.  It’s pretty easy to sign up for, and can be very helpful as it uses pre-tax money for stuff you would have paid for anyway with your after-tax money.  Leave any questions in the comments below.

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Comments

  1. Nice overview Syed. I don’t use a healthcare FSA, we just don’t have many healthcare related expenses. But I could be proactive about it and plan for things like annual contact lens purchases and some random doctor visits for my son.

    One thing to point out, I think that the money left in the account would go to the FSA provider rather than the Feds. I do have a dependent care FSA and that’s how it works for that one. A good deal for the providers!

    • Thanks for the reply Kay! Yeah I just chose the default path and blamed the government but that’s good to know thanks for the info.

  2. Thanks for this Syed.
    What insurance do you recommend for the newly self-employed? (Age 35+fit) Am I even eligible for HSA?

    • Glad it helped James. My advice would just be to go to ehealthinsurance.com and see what’s available. Since it sounds like you don’t really go to the doctor often, you would be fine with a high deductible plan. If your deductible is high enough, then you can be eligible for an HSA. For 2014 the minimum deductible amount needed according to the IRS is $1,250 for an individual plan and $2,500 for a family plan. Thanks for the comment.

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  1. […] the IRS allows us to fund tax free for our healthcare expenses.  Previously, I wrote about the Flexible Spending Account (FSA), which allows you to set aside a certain amount of money before taxes towards your healthcare […]

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