Flexible Spending Accounts Useful For Health Expense Savings

Dollars IIMedical expenses are by far the most common cause of bankruptcies filed in the United States. Even though 78% of all filers had health insurance, 42% of bankruptcies resulted from health and medical expenses in 2010. Taking advantage of savings options to help with out of pocket costs should be considered as a necessary supplement to health insurance coverage.

One such savings option is taking advantage of a flexible savings account, often offered through employee benefit or cafeteria type plans. Though these accounts have been available since 2003, only 37% of employees who had access to a FSA in 2010 elected to use one.

Get to know the basic components of flexible spending accounts, their advantages and disadvantages and possibly save money in taxes. This can possible create a pool of money to use for out of pocket health and medical expenses at the same time.

FSA Basics

Also referred to as a flexible spending arrangement, a flexible spending account is a tax advantaged financial account that can be set up through certain US employer benefit plans. Using this type of account, an employee is able to set aside a portion of earnings through a salary reduction agreement to pay for qualified expenses. The amounts set aside are done so before taxes, therefore decreasing taxable earnings.

There are two types of flexible spending accounts, the most common medical (and dental) expense FSAs and less common dependent care FSAs. A medical and dental FSA covers expenses not paid for by insurance such as deductibles, co-payments, and coinsurance. Over the counter medicines are also allowed when they are purchased with a doctor’s prescription. Generally, allowable expenses are the same as those allowed for medical tax deduction.

According to the IRS, employees may fund accounts up to an annual limit of $2,500, but employers may limit account funding further. The limit set by the IRS will be indexed over time to account for cost of living adjustments.

Dependent care FSAs pay for expenses to care for dependents claimed on federal tax returns. These dependents can include children and seniors cared for in the home. There is a federal cap set on the funding of these accounts at $5000 annually.

FSA Advantages

  • The entire annual contribution is available for use by the employee at the beginning of the benefit period or plan year even though the account is funded incrementally throughout the year by employee earning’s deductions.
  • Withdrawals from the account are done so tax free.
  • The annual medical expense FSA limit of $2,500 is per employee, not per family. Potentially, spouses or an employee with two separate employers could have a combined total of $5,000 in medical expense FSAs.
  • Employers may also contribute to employee FSAs in some cases.
  • Some employers offer debit cards for flexible savings accounts to be used with qualified purchases. In some cases, itemized receipts are required. Many pharmacies and drug stores are kept informed of the rules concerning FSAs and receipts are not required when the FSA debit card is used at these locations.

FSA Disadvantages

  • If an employee terminates employment or is laid off, funds contributed to a FSA may be lost. Many times, employers do not give employees enough time to use funds in accounts before giving layoff notice. Amounts left in FSAs are available for use if benefits are continued through COBRA.
  • Flexible spending accounts only cover the benefit or plan period and are subject to the “use it or lose it” rule. If funds aren’t used before the end of the plan coverage period, they will be forfeited. Some employers offer a grace period of two and a half months following the plan coverage period where amounts can be used.

Employees are offered the chance to participate in flexible spending accounts during an employer’s open enrollment period when benefits and packages are chosen. Elections should be reviewed from year to year, using the prior year’s medical expenditures as a basis for how much should be contributed to a flexible spending account.

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