Flexible Spending Accounts just got better

Let’s talk about your health care.  No, this is not a political post. But the government has changed a rule for your Flexible Spending Account.

If you receive health insurance from your employer you probably have the option to fund a Flexible Savings Account (FSA).  This account allows you to save up to $2,500 a year before taxes and spend the money on health care expenses.  (If you choose a high deductible policy then you have a Health Savings Account which has different rules.) The drawback to a FSA is that it lasts for just one year — if you do not use the funds you lose them.

The rules were changed a few years ago, allowing you to spend your balance until March 15th of the following year.  On October 31st, a new rule was unveiled which allows you to carry over $500 to the next year’s FSA account.

This is great news since one impediment to fully funding a FSA was the fear of losing it, or having to use up the amount for something you may not need.  (Do you notice the ads between now and the end of the year reminding you to use up your account balances on eyeglasses?)

Fine print – even though the federal government has made this policy change it is still up to your employer to implement this strategy.  This new rule, if implemented, would replace the March 15th grace period.  Check with your employer to see which rule they are implementing for 2014.

Even without this change, an FSA is a great way to save money on healthcare.

Spending the FSA account — There are many options to use the FSA money and the big categories are

  • Copayments for doctor, dentist and chiropractic visits
  • Copayments for prescriptions
  • Eye exams, glasses, contacts and saline solution
  • Dental and orthodontic expenses

For an exhaustive list, I found this great site from Aetna

http://www.aetna.com/members/fsa/eligibleExpenses/healthcareFSA/healthexpenses_A.html

How much should you fund?  If you funded an account last year and spent everything, then increase your amount.  If you have never taken advantage of an FSA, take a few minutes and add up what you spent out of pocket this year.  If you use mint.com, you can just run a report on Medical Expenses.  Based on what you spent this year, you can get a good estimate of what you will spend next year.  Don’t forget to add on any planned medical expenses.  For example, I know that I will be replacing a crown next year.  My dentist already gave me an estimate of the procedure and how much my insurance will cover and what I will need to pay.

Is it worth it?  Yes!  For each $1,000 I put into an FSA I could save $262 in taxes.  How? $150 is saved with federal taxes (assume a 15% tax rate), $62 from FICA (6.2% rate) and state tax of $50.  (Illinois, where I live, has a 5% income tax rate)

So, before you turn in your open enrollment forms, take a look at a Flexible Spending Account. It will not make you rich overnight, but it is a great way to keep your money feeling better