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The Benefits of Flexible Spending Accounts

Getting treated for illnesses is becoming more expensive, each year. Further, if you are regularly on perscriptions, this is not cheap either. Employers are doing their best to offset high healthcare costs, but they have to pass on the cost, at some point. With many employers, the option has been to have higher deductables, as well as, having employees bare more of the premium costs. When you pay more of the premium, you do so with pre-tax funds. Wouldn't it be great if you could do the same thing for medical expenses not covered by insurance (e.g. deductables, prescriptions, elective surgeries)? Today, with most employers, you can. The answer is a flexible spending account, or FSA.

What is an FSA? It is a way to set aside money, pre-tax, for medical expenses not covered by insurance. Essentially, you have to decide on some amount of money, annually, that you would like set aside. No one can do this for you. You may know of upcoming surgeries, recurring prescriptions, or your deductible that you can reference to get a ball park figure. Another benefit to this is that you do not have to wait for the payroll deductions in order to use the funds. For example, let's say that you elect to have $1,200 deducted from your payroll for your FSA ($100 per month), over the course of the year. If in February you decide that you would like to get lasik vision correction, you can use the entire $1,200 to pay for that in February, rather than waiting until the funds have been deducted. So, that is like interest-free money (better than getting that surgery financed). Also (and employers probably like to make this known), if you use all of your funds for the year, and then leave the employ of the company, you do not have to repay the benefits (the employer takes the hit). However, there are some downsides. The main downside is that you can not roll the funds over. So, if you only use $800 of the $1,200, then your employer gets to keep the remaining $400 (the advantage they receive for the risk of letting you use funds early). In addition, you loose the flexibility of using the deducted funds for other expenses, if you do not need them for medical reimbursement.

There are significant tax benefits involved with FSAs. Since it is a pre-tax payroll deduction, any funds diverted reduce your adjusted gross income, which may have the benefit of moving you to a lower tax bracket. Also, since the funds are pre-tax, you never pay taxes on these funds. As an example, if you have $100 deducted per pay period, and you are in the 35% tax bracket, you only notice about $65 difference in your net income (take home pay). Many will tell you this is free money (I won't, because it was your money in the first place, but that is a different subject).

Now, if you have an FSA with excess funds, and you are approaching the end of the year (like we are right now), you can stock up on over the count medicines, get a new pair of prescription glasses, pre order disposable contact lenses and cleaning supplies, or look for items that you have not been reimbursed for already. So, if at this time, you realize that you have not spent all of the funds in your FSA, there is hope.

Also, many employers have options in their FSAs for child care expenses. If they are offered, the funds are seperated (so, you can not use funds set aside for medical expenses to cover day care for your child, or vice versa). Also, these funds are for child care expenses related to your job. So, you can not use these funds to have a babysitter watch your children for a night out on the town.

All in all, FSAs are great tools for you, if they are available. Consider your expenses wisely, and see what advantages are available. I know that I will be getting lasik vision correction next year. It is a great investment, because I spend over $300 a year on glasses, and about $100 year on contacts. My employer, as well as many others, do not provide vision insurance any longer (our medical does qualify us for $5 vision checkups, however). So, each year I go without correcting my vision is money down the drain. I expect a return on this investment within two years, and it will be made easier because of my FSA.

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Anonymous Blue Cross of California Says:

December 19, 2005 12:43 AM 

Flexible spending accounts are a great way to have health coverage especially as health care costs are rising so quickly.

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