Wednesday, October 8, 2014

How does a flexible spending account work?

Flexible spending accounts are one of those little workplace benefits that make great sense for some employees, but not so much for others. Your benefits administrator would have you believe that it’s a great deal regardless of your situation, but depending on what’s going on in your life right now, you may find that an FSA isn’t the best deal going to help cover your medial expenses. Only you can decide, but hopefully, this will shed some light on the murky waters of flexible spending accounts and what they are used for.

Flexible spending accounts are limited somewhat in what you can purchase with them. Perhaps this is the best place to start. They do cover doctors’ visit co-pays, home modifications for disabled access, and prescribed drugs, but as to specific things, it’s best to check your plan coverage, because not all plans are alike. Some things that you might consider medical use may not necessarily be something that you can purchase with the proceeds from an FSA. For instance, non-prescribed medicines like aspirin aren’t payable. At their core, flexible spending accounts are all about helping offset major medical and medically-related expenses. Aside from this core benefit, they’re also laid aside pre-tax, so by maxing out your FSA expenditures at $2500 per year, you’ll reduce your taxable income by that amount.

That little tax benefit comes with a cost, however, and its one that has got many people scratching their heads wondering what plan providers are thinking. The biggest downfall of FSA accounts is simply that if you don’t use the funds that you invest into the account before a year has passed, you lose those funds, and your account balance cycles over to zero balance. Now, typically, this has caused a run on medical-related expenditures between November and December as people have gotten wise to this tactic, but the IRS has now implemented a program that allows for an extra two and a half months’ breathing room beyond that one year timeline. Of course, it’s up to your company to decide whether or not to provide this benefit. You’re probably curious where that lost money goes (and it’s significant, totaling hundreds of millions of dollars every year. The simple answer is that it goes back to the company.

Now, before you go lighting torches and grabbing your pitchfork, keep one thing in mind: Those unused funds that go back to the company have to be used in certain ways. They can’t just give it to the CEO as a bonus, but neither can they just cut you a check for it. Rather, the money is used to administer the plan in your company, and pay the benefits administrator salary. So, it isn’t all bad. There are some pretty significant benefits for what is likely to be relatively little cost to you.

So, now you have to ask yourself, is an FSA right for you? It may or may not be. If you are generally healthy, have little or no medical expenses, and don’t foresee yourself having much in the way of medical expenses this year, then a flexible spending account is probably going to be just a waste of money for you. Sure, it will reduce your taxes a little, but unless it’s enough to bump you to a significantly lower tax bracket, then you’ll spend more on it than its worth for you. If, on the other hand, you find yourself in the situation in which you’ll have a lot of medical expenses in the coming year, then an FSA is a great way to minimize the impact on your finances, and make sure that your budget won’t suffer much.

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