The following is a guest post by James Yeung. James is a full-time software developer and a part-time Flexible Spending Account enthusiast. You can follow his adventures in trying to squeeze the most out of his FSA at FSATips.com. Enjoy!
I will take it for granted that the savvy readers of this blog are motivated money-savers. The folks here are the types who want to take charge of their financial journeys, but are also willing to put in a little effort to reach their goals. So perhaps my message today is just preaching to the choir; Nevertheless, it never ceases to amaze me what excuses people will give for leaving hard-earned money on the table.
Let’s take that health Flexible Spending Account, for example. You know, the one that is offered by your employer, which allows you to put away some of your pre-tax earnings to spend on eligible health-related products and services?
If you are already enrolled in one from your employer, congratulations, you understand the power of effectively getting a huge discount on goods that you may already purchase frequently. And if you are not, I want to use this opportunity to read your mind with 4 excuses that you are most likely harboring.
Excuse # 1 – FSAs are complicated, and I don’t get it
Just try to take a moment to understand it. You first decide any amount (up to $2,550 for 2015-2016) to contribute to your FSA account based on your estimate as to how much you or any family member might need for medical expenses that coming year. Your employer deducts a pro-rated amount (before taxes) from each of your paychecks and straight into your FSA, until it reaches the total amount you designated. Then starting from the benefit year, whenever you pay for a “qualified” medical expense used by anyone in your family, you’ll pay from your FSA account. (You’ll use an account-linked debit card, OR pay out-of-pocket up front and get reimbursed from your FSA later). Notice your FSA was funded by your salary before Uncle Sam takes his portion (taxed), which is the reason all of this is magic and worth your while. Your savings depends on what tax bracket your salary puts you in, but given the typical range of 20% to 40% for federal income tax, it’s sure worth it. There are rules to what qualifies as a medical expense, yes, sometimes it can be a drag to submit reimbursements. But like anything, if you learn the rules, it will become easy to save money.
Excuse # 2 – It’s just not worth the hassle of dealing with the paperwork
Let’s say I give you $2550 to put in either a savings account, the stock market, or an FSA for one year. Depending on your tax bracket, FSAs will guarantee a 20% to 40% return. If you can guarantee that on Wall Street, you’ll probably have a ton of wealthy clients wanting to invest with you. And let’s not even mention how that trounces the pitiful interest rates on savings accounts these days. So suppose your tax bracket is at 30% of your income. If you designate the max $2550 in your FSA and use it all up on qualified expenses, you’ll have a return of $765 this year. Is that worth learning how to use your FSA and navigate the documentation? It sure has been for me. Plus, it’s become easier to deal with reimbursements through FSA debit cards that reduces a lot of paperwork.
Excuse # 3 – Look, I don’t have enough medical expenses to bother
It’s probably like many of us to underestimate what we’ll spend on medical, dental and vision expenses.
But think for a minute: If you might see a doctor, dentist, or get an eye exam this year, know that your co-pay qualifies as an FSA expense. Wear contacts? Your pricey disposable contacts and contact solution (yea even the fancy kind that bubbles/oxidizes) is FSA-worthy. Want that latest pair of Warby Parker eye-glass frames this year? Thanks, FSA. How about that unplanned (aren’t they all) cavity that needs filling? You might have a pretty high deductible to pay to your dental insurance. Well, your FSA will relieve some of that pain by paying for it with its pre-tax goodness. You get the gist. Think of it as getting a 20% to 40% discount (again, depending on your tax bracket) on all this FSA-qualified stuff you already pay for on a regular basis.
Be sure, however, to check your FSA administrator’s guidelines for which eligible items require a doctor’s prescription and which do not. It’s not intuitive at all, for example: Contacts solution do not require a prescription, while over-the-counter drugs such as aspirin, allergy, cold/sinus, antacids, and laxatives DO require a doctor’s prescription to be eligible. The rules can seem arbitrary, so check your FSA guidelines or online resources.
Excuse # 4 – All sounds great, but I’ll end up losing what I haven’t used by the end of the year!
The much-feared “Use-It-or-Lose-It” rule USED to be a legitimate reason that scared folks off from using an FSA. Mainly because funds you didn’t use in the allotted benefit year expired and went straight to your employer’s pockets. But starting in 2014, the IRS decided to allow employers to either allow up to $500 of unused balance to rollover to the following year, OR offer a grace period (typically 2 and a half months). Great, huh? But even if your employer is really mean and doesn’t offer either of these, a little planning should give you confidence that you’ll be able to use up every penny of your contribution.
Convinced yet? My hope is that you will invest a little effort and give that FSA a shot this year. Luckily, there are more and more wonderful communities online, like this My Personal Finance Journey blog, to support you. Just remember, during this open-enrollment season with your employer, give the health Flexible Spending Account a chance to save you some hard-earned money!
How about you all? Do you currently take advantage of an FSA through your employer? If so, what do you like or dislike the most about it?
Share your experiences by commenting below!
***Photo courtesy of https://www.flickr.com/photos/84335369@N00/7543295456/in/photolist-4rBa75-dSK3tm-8BNp8N-cuzmWd
