Flexible spending accounts for health care are becoming a very common benefit that employers provide for their employees. These accounts can be a money-saver, but it can be a bit tricky to save money using them.
First of all, let’s back up and explain exactly what a flexible spending account is.
A flexible spending account (or FSA for short) is an account (usually set up by your employer) into which you can put pre-tax money. In other words, the money is deposited before taxes are calculated on your income, which means that you’re actually going to be paying less taxes than before.
For a simple example, let’s say you earn $500 a week and have 20% of your check taken out for taxes (we’ll ignore other expenses for simplicity’s sake). That leaves you bringing home $400 a week. Now, let’s say you decide to start putting $20 a week into a FSA. That means you’re now effectively earning $480 per week. That same 20% is taken out, which means that you bring home $384 a week. You’re putting $20 into your flexible spending account, but your paycheck only goes down by $16. You essentially get $20 to spend on health care costs, but you’re only actually spending $16 out of your paycheck. It’s like $4 in free money per week.
The only drawback is that the money deposited in your FSA must be spent on approved health care costs.
What’s an approved health care cost? Pretty much anything you can realistically imagine qualifies. Doctor’s visits, dental visits, surgery, chiropractic work, psychiatry, prescription drugs, lab fees, inpatient alcohol and drug treatment, “quit smoking” programs, birth control options, and may other treatments that fall under “alternative medicine” qualify under this plan. If you’re unsure, check with the plan offered by your employer.
There is one big drawback to the FSA, though: you have to use that money or you forfeit it. You have three months after the end of the year to make claims on money saved during the previous year. If you don’t, that money is forfeited. It doesn’t build up.
Thankfully, many plans make this easier by offering a debit card for easy access to the FSA. When paying for one of the approved expenses, you simply use your debit card and then your FSA is billed for the expense. If the bill exceeds what’s in your account, you’re billed for the difference.
Even so, you’ve got to be sure that you’re incurring enough regular medical expenses to make the FSA worthwhile. If you never go to the doctor and never use any sort of medical care, then your money in this account would likely be forfeited each year.
However, for people like me on a maintenance medication (I’ve been taking synthroid literally since birth), a FSA can be a real money saver. I can just use a FSA debit card to buy my prescription each month and that prescription is paid for with pre-tax money. The same goes for my routine blood work. Since we also take our children in for their yearly checkups (and, for our younger kids, the checkups were even more frequent) and we’re fairly vigilant about getting illnesses and other concerns treated, we end up saving quite a lot thanks to the FSA.
The trick is to put in enough so that most of your expenses are covered, but not so much that you lose the money at the end of the year. We just try to cover the things we know we’ll have to pay for and pay the rest purely out of pocket. After all, every dollar saved is a dollar put towards something else more useful in our life.
If your employer offers a FSA and you have any regular medical expenses in your life, give the account a serious inspection. You may find that it’s a pretty easy way to save a bit more money. Learn more about leveraging health savings accounts and FSAs for your health care benefit.
This post is part of a yearlong series called “365 Ways to Live Cheap (Revisited),” in which I’m revisiting the entries from my book “365 Ways to Live Cheap,” which is available at Amazon and at bookstores everywhere. Images courtesy of Brittany Lynne Photography, the proprietor of which is my “photography intern” for this project.