A flexible spending account is a benefit that may be offered by your employer that allows you to set aside money during the calendar year to pay health or medical expenses, plus additional qualified expenses such as day care fees. The key is to know how to best estimate how much money to set aside, then to maximize its use so you won't forfeit any of that money.
Each year, as you determine which health insurance plan is the right one for you during your open enrollment period, your employer may also allow you to set up a flexible spending account. In order to do that successfully, you'll want to understand how to maximize the use of a flexible spending account (FSA).
Among other Internal Revenue Service (IRS) rules, there are two main points to know about an FSA:
1.You will determine a total amount of money you expect to spend during a calendar year on qualifying out-of-pocket expenses (see below.) That total will be divided by the number of paychecks you receive in a year, and that amount will be deducted, then put into your FSA account. Some employers make contributions to employee FSAs, in which case the amount taken from your paycheck will be reduced by the amount your employer contributes.
Since the money deducted from your paycheck comes out before you pay taxes, you will save the amount of money your taxes would have cost you. The amount you will save depends on your tax bracket and your other deductions. Example: if you are in the 25% tax bracket and you put $1000 in your FSA, you might be saving $250 in taxes.
As long as you only ever spend that money on qualifying expenses, then you'll never pay taxes on it. You will not have an opportunity to spend it on any other kind of expense, however....
2.If you don't spend all the money that has been deposited to your FSA before the end of the year in which it was deposited, then you will forfeit that money. You can't carry it over from year to year.
Therefore, knowing it can be a big money saver as long as you use up all the money in the account, you'll want to estimate very carefully the amount to set aside in your FSA. You want to deposit as much money as possible to get the biggest tax break, but you want to be sure you don't deposit one penny extra so you won't lose any money.
<b>How to Determine How Much Money to Set Aside in a Flexible Spending Account (FSA)</b>
1. Just as you have estimated your healthcare costs for determining your best option for health insurance during open enrollment, you'll want to figure out your best guess on your out-of-pocket medical expenses (and other qualifying expenses) during the next year. Included in this list will be all those health and medical expenses that your insurer doesn't cover, such as vision, dental, over-the-counter drugs, hearing aid batteries and dozens more.
The IRS maintains a list of health and medical qualifying expenses which may change from year to year. Please note that FSAs also allow set asides for additional non-medical expenses.
As best as you can, make a list of what those expenses may be. Develop a scenario for you and your family that will become the guesstimate you will work with. Include amounts such as the number of doctor appointments each family member might average in a calendar year, multiplied by the co-pay for each one. Does anyone in your family wear glasses or contacts? Figure in your out-of-pocket costs for them. Do you pay out-of-pocket for dental coverage? Include those costs in your list. What over-the-counter drugs do you take? What about birth control?
Take a good look at the IRS rules for FSAs and be sure to include everything you can think of on your cost guesstimate list.
2. Now that you have your best guesstimate of what your total cost of qualifying expenses will be for the year, you can use it to do math in two directions, one conservative and one a bit riskier:
•The more conservative approach is to be sure you set aside less than you think you'll spend so you don't forfeit any money at the end of the year. If you spend more than you set aside, it simply means you will have paid tax on that extra expense because it won't have been included in the FSA set aside. If this is the approach you want to take, then multiply your guesstimate by 80% or 90% to arrive at the FSA set aside amount you'll report to your employer.
•A riskier approach is to report the entire guesstimate amount to your employer, even if you aren't sure if you will spend it all. That will allow you the biggest tax advantage. Even if you don't spend it all, the break on the tax for the amount you didn't spend will likely make up the difference. In the example above, you saved $250 on your taxes. As long as you spend more than your guesstimate minus those $250, you will have gotten a benefit from your FSA.
One final, important step in maximizing the use of your flexible spending account:
Make yourself a calendar note to review your usage of your FSA by mid-October. Your review will tell you what steps to take if you are running out of money, or if you risk losing some of the money you set aside.
If you find you may have money left over, then make those appointments you accounted for in your guesstimate, but have not followed through on. For example, you may have added in vision appointments for family members who haven't yet been to the eye doctor. Or maybe you take an over-the-counter daily vitamin or perhaps your doctor has recommended a screening test you can fit in before the end of the year. The About.com Guide to Health Insurance has a list of ideas you may not have considered to help you spend that money.
Note that you can spend the money on health-related expenses you didn't include on your original list, too. You may run into a medical problem you could not have anticipated when you made your guesstimate. The IRS doesn't care what those expenses are, as long as they are included on the list of qualifying expenses.
If you won't have enough money to pay for your remaining appointments, drug prescriptions and others, then determine which expenses you can postpone into the next year. Then include them in your guesstimate for next year as you determine the adjustments you want to make to your FSA.
By Trisha Torrey, About.com Guide
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