How to Flex Your Financial Muscle with FSAs

If you work for the government or a big company, you can save hundreds of dollars a year in health costs. But odds are good that you’re not taking advantage of the opportunity.

That’s because most big employers do a terrible job of touting one of their best benefits. They’re called flexible spending accounts, or FSAs. And if you’re eligible for one, it’s certainly something to consider.

So what are FSAs?

FSAs are essentially accounts where you deposit pre-tax money from your paycheck to pre-pay certain eligible expenses. For instance, if you opened an FSA for childcare, you’d tell your employer to automatically deduct, say, $50 a week from your paycheck and put it into your FSA. Then you’d spend that money on childcare – and not pay taxes on it.

That’s because the government allows your employer to deduct that money pre-tax. So literally, the more you spend, the more you save. And since you’re setting aside money you know you’re going to spend anyway (more on that in a minute) there’s no downside, other than some initial paperwork.

You can have an FSA for several things, but the most popular – and money-saving – is for healthcare.

Some employers don’t do a great job of explaining their FSAs. If you work at Ohio State University, you have to navigate this site and its links to enroll in their FSA. If your employer’s FSA explanation isn’t in plain English, here’s one that is: Save Smart Spend Healthy focuses just on healthcare FSAs. It’s funded by a company that provides FSA coverage to employers called WageWorks.

The pros and cons of FSAs

With such a great tax-saving idea, you’d think employees would be waiting in line to sign up with their Human Resources departments. But a study by HR consultant Hewitt Associates shows that 80 percent of eligible employees don’t take advantage of FSAs. “However, employees who do participate find the benefit very valuable,” the study says. “Individuals typically save between $250 and $400 each year in federal taxes.”

So why the lack of interest? Reasons range from poor marketing to employee apprehension about a concept that sounds too good to be true. But a big reason people may shy away from an FSA is the big potential con to FSAs: If you set aside too much money and don’t spend it during the year on things like deductibles, co-payments, coinsurance and eligible health-care expenses, you lose that money.

So you have to be careful to set aside only the amount you know you’ll use. Obviously nobody plans to get sick, which may make this task seem difficult. But there are expenses you know you’ll incur: you’ll probably buy aspirin or other over-the-counter medicine: that’s covered by your FSA. So are band-aids. So are medical devices. There are pages of stuff on Overstock.com that are FSA-eligible. Basically anything that’s deductible as a medical expense by the IRS is FSA-eligible, with the notable exception of health insurance premiums. Here’s a list of eligible expenses.

Other things to consider about FSAs:

• Since the money is automatically deducted from your paycheck, you don’t notice it.
• Many health insurance plans won’t cover ‘voluntary’ procedures: for example, lasik eye surgery, or plastic surgery. (Cosmetic surgery is not an eligible expense.) But you can use money in an FSA to pay for these things. So if you’re planning on having lasik this year, settle on a price, have that amount taken out of your paycheck pre-tax, and use it to pay for the procedure. If it costs $1,000, you’ll save up to $350 in federal income taxes. You can also use your FSA to pay for things your insurance might not – like eyeglasses, contacts or dental work.
• In the past, many people used money in an FSA to pay for preventative healthcare, since those expenses were often not covered by their health insurance. But beginning as early as September 23, 2010, thanks to the Health-Care Reform Bill, preventative care may be 100-percent covered by your current health insurance: talk to your HR department for details regarding your plan before you put money in your FSA to pay these expenses.
• An FSA is a great opportunity to learn the basics of budgeting: an FSA requires you to estimate your expenses in advance and do everything possible to meet that estimate. So when you review your healthcare expenses from last year and figure out how much to put into your FSA this year, keep going – apply that same budgeting technique to your other expenses!

Who can get an FSA

Sadly, not everyone can take advantage of FSAs. Your employer has to offer the program, and it’s mostly big companies and government agencies that do so. For instance, this website is where employees of the federal government’s executive branch would learn about their FSA. So check with your HR department or benefits coordinator and ask if your employer offers an FSA. But do it soon, because like health insurance, you can only do so during “open enrollment.”

That time period is limited and varies by employer. But in many places, it’s coming up real soon. In New York State, for instance, open enrollment is Sept. 20 through Nov. 15, while at Michigan State University, it’s from Nov. 2-16.

If your employer doesn’t offer an FSA, ask if they’ve ever considered one. It’s a valuable benefit for employees that doesn’t cost the company much.

What about an HSA?

While the initials are similar, and both are associated with healthcare, a Health Savings Account, or HSA, has a completely different set of rules from an FSA. HSAs – most often coupled with high-deductible health plans – are also savings accounts, but they allow you to make tax-deductible deposits to an account where your money accumulates tax-free until it’s needed for healthcare expenses. Money deposited in an FSA has to be used that year – money deposited in an HSA can build up for a lifetime. But HSAs are typically only for those who pay for their own insurance – an FSA is for those who have employer-sponsored health insurance.