How Does A Flexible Spending Account (FSA) Work?

This year my company informed us that our company’s health care costs were starting to get out of control.  Premiums for employees and for the company’s portion of the bill were rising.  With all the uncertainty that has come with Obama’s Health Care plan and as to what will be covered in the future, this year the company decided to kick the can down the road on making hard decisions with the company’s health care plan and do a few things to help us save money this year.  One thing that they implemented for employees this year was a flexible spending account or FSA.  By using this FSA our family will save hundreds of dollars this year on our taxes.

While the FSA has worked out great for us because of our high health care spending at our household this year (we had a baby), it may not be the right option for everyone.  We’ll explain below.

So What Is A Flexible Spending Account (FSA)?

Flexible Spending Accounts aren’t something you’re going to find at all places of employment because not everyone offers them.  In addition if you’re self employed, you aren’t able to participate in a FSA plan.

Usually how the FSA plan will work is your company will have an open enrollment period where you can sign up for the company’s plan.   Our company had that enrollment period earlier this year when we jumped on the opportunity because we knew we were going to have a lot of medical expenses this year with a baby on the way.

When you sign up for your company’s plan you’ll need to elect an amount that you want deducted pre-tax from your paycheck.  That amount you elect to have deducted from your pay will then be split up into your pay periods and deducted from each check.  By deducting the money pre-tax it means that you’re saving a good amount of money on taxes for the year.   The more you deduct for your expected medical expenses, the more you’ll save.

Normally you can’t change your amount you’ve elected to deduct from your pay during the year unless certain life events have happened and there has been a change in your employment or family status. (you have a baby or get a new job)

FSA Contributions

As mentioned above when signing up for your FSA you’ll need to tell your employer how much you want to contribute to your account for that year.  To do that you’ll want to estimate how much money you think you’ll be paying  on medical expenses for the year out of pocket for things like doctor’s visits, prescriptions, dental care, and so on.

The government doesn’t currently have a limit for the amount that you can add to your FSA account, although most employers will cap the FSA account at a certain percentage or around $5000.  My company plan has a limit of $5000, although we designated less than that at $3000 for the year.   With that amount we were reasonably sure that we would be able to spend all the money as we were having a baby this year.  Remember, you need to be careful about how much you designate for your account, because you have to spend the money – or risk losing it! More on that in the next section.

Our plan has a maximum of $5000 that you can contribute, and at this time we’re contributing $3000.  We are expecting our first child this year, and we expect to have substantial medical bills because of that, so using a FSA this year is a good choice for us.  With the life change event in July when the baby is born we can elect to increase our contributions if needed.  If we expect to use all $5000 of the maximum allowed, we can add the extra contributions to our plan at that time.

FSA Contributions – Use It Or Lose It

FSA plans in most cases have a rule that you must spend the funds added to your account during the year, or you’ll lose the money to the plan where it will be used to help cover costs of other plan users who have left their job during the year (before they could add all their funds to the account – even though they’ve used up their total amount already).

Since funds are subject to forefeit you’ll want to make extra sure that you are careful about estimating your health care costs and that you come as close as possible to the reality of what your costs are.   For us, we knew just about what we would spend this year based on our spending last year, and the estimated costs of having a baby at our local hospital. In the end we’ll end up spending a bit more than we have in our account, but I would rather under-estimate than over estimate – and lose the funds.

FSA Funds Can Be Used At Any Time – The FSA Loophole

One thing that is nice about adding money to a FSA is that you can use your elected funds at any time after you sign up. For example, we have only put in about $1000 in our account so far this year, but within the next couple of weeks we’ll have submitted for reimbursements from our account for the full $3000 amount.  As long as you’ve signed up for the account, and are in the plan, you can use up to your full plan election amount at any time.

This point of the FSA has been referred to as the FSA loophole because if you end up leaving a job only part of the way into the year, you no longer have to make contributions to your FSA, even though you’ve used all of your money for the year.  The negative balance in your account is balanced out by funds not used by other plan members who have forfeited their funds at the end of the year.

You will sometimes see people who are planning on leaving their company sign up for the FSA plan anyway, knowing they can take advantage of the loophole.

Getting Reimbursed For FSA Approved Expenses

For most FSA plans how it works is you’ll pay for all of your health care expenses out of your own pocket, and then once you pay you just submit a claim for reimbursement.   Usually you’ll get reimbursed in one of three ways.

  • By Check: You submit documentation of your approved expenses, and within a couple of weeks you’ll receive a check in the mail.  If something isn’t approved or you need further documentation, you’ll receive notice.
  • Direct Deposit:  Again, submit your documentation proving your expenses, and if they’re approved you’ll have the money deposited directly into your account. For us, this is the way our plan works – we submit a fax to the Flex Spending plan administrator and they approve our expenses or ask for more documentation.
  • FSA debit card: Some plans will just give you a debit card for your flex spending account that allows you to use it to buy approved expenses directly using your funds.

Changes To Flex Spending Accounts Due To Obama Care

After the health care law was passed earlier this year there were a couple of pretty big changes made (for the worse in my opinion).

  • Over the counter medicines: Starting next year in 2011, flexible spending account money cannot be used for over-the-counter meds unless they are specifically prescribed by a doctor.   In current law your FSA funds can be used for over the counter drugs and other items such as eyeglasses, contact solution, bandages and non-prescription forms of birth control.
  • Limits on your contributions: Starting in 2013, your contributions to  your FSA will be capped at $2,500 each year with annual inflation increases. Although there are currently no limits, most employers cap the maximum somewhere around $5,000.

Why are these changes being made?  Because they want to collect as much tax money as possible in order to help pay for the trillion dollar Health Care plan.  Personally I’m not happy about it as it means I’ll most likely end up having to pay for more taxes.

Why FSAs Are Great

If you know that your family will be incurring substantial medical costs during the year, using a FSA plan sponsored by your employer is a great idea.  If you estimate how much you’ll spend, or even if you know that you’ll be leaving your job and want to take advantage of the FSA loophole, you can come out substantially ahead.  At our house this year we estimated the amount we were going to spend at around $3000, and in the end we’ll end up saving almost $1000 in taxes.   Want to figure out how much you could save, check out this FSA Savings calculator.

Do you have a flexible spending account?  How much were you able to save in taxes due to your FSA? Tell us your FSA experience, or ask us questions in the comments!

The following two tabs change content below.
I’m a thirty-something Christian Midwestern father of one son, and have been happily married for 9 years to my beautiful wife. I love playing tennis, shooting hoops, or taking part in the occasional flag football game. Of course, I love writing and financial topics as well, and that's how this site came into being! Check me out on Google +!


Comments

  1. says

    I’ve found that mine FSA is an extreme pain in the rear to manage. You must take into account the administration that you will have to do before signing up for this. There are some savings certainly, but you will spend hours transmitting receipts and dealing with the claims. My benny card is shut-off regularly and it’s quite the hassle. They shut it off when you have yet to provide a receipt for something them deem required.

    • says

      That stinks that yours has been so hard to manage. I was afraid mine was going to be that way as well, but in the end ours has been extremely easy. We just keep a folder for receipts from approved expenses, and then once a month or so i scan them in and fax them to our benefits company. Within a few days a direct deposit shows up in my account. Piece of cake. I have had a couple of times where they requested more documentation for something, but I was able to provide that with not too much work.

  2. says

    This is something many don’t think about, and miss out on free money.
    One huge item – Braces. Nothing like finding out that J2 needed braces, nearly $5K over 2 years.
    Most companies have a sign up period in October. Your readers should look carefully at the dollars they spend that they can make pre-tax next year.

  3. says

    I love my FSA! I love the fact that we can spend more than we have contributed (as long as it’s below our annual amount), and that we can buy OTC medications even though they are not deductible on a schedule A.

    Getting rid of OTCs is one of the many reasons I’m against the “healthcare reform” bill.

  4. FSA Question says

    Hi Mr. Money… your article on FSA’s was great! I have a question and you seem very knowledgeable about them so I thought I’d ask. I recently found out my company is being bought out in a month and I am not even mid way through the FSA. Our HR director told us that we could use the full amount of our FSA cards without paying, just like you mentioned in the FSA loophole. My problem is, I did the maximum, knowing we’d be having a baby this Fall and lots of health expenses with that, and I can’t even use what I paid for the past few months because most of my expenses will be after the baby comes. I spoke to my hospital, and they will take any payment I make and put it under “unapplied charges” like a credit… will this get approved by my FSA do you know? Are there any other ways to get around this so I don’t lose the money I put in?
    thanks!
    julie

    • says

      I’m not sure about this, I’ve never run into this situation. My understanding is that if you were to leave a job, you could use up to the full amount, even if you hadn’t paid in the full amount, but i’m not sure of how that would work if the company is being bought out. There is no provision for a FSA at the new company or anything like that? My guess is that you would need to use the full amount – and as far as whether or not it would be approved for “unapplied charges”, I don’t think it would be. On one other site I found this wording:

      Flexible spending dollars cannot be used for non-employer sponsored insurance premiums, preventive care such as vitamins and supplements, prepayment of services that have not yet been rendered.

      Of course that would be something to ask the company that does your FSA. I know we’ve had a couple of different benefits company at my job, and one was more stringent than the other one – so it may depend.

  5. Liilly says

    I am expecting to have a baby in July. In the meantime, had complications and have several medical bills to pay for services in January. My husband and I put in $4000 in FSA but this is not enough to cover the medical bills. Since you can increase your FSA once the baby arrives, is it possible to opt to maximize to $5000 when the baby comes & get reimbursed for services in January? Or is the rule that the FSA increase in money is only to be used for services after the baby is born?

    • says

      I believe as long as you haven’t paid the bills yet, and have the receipts to send in when you ask for reimbursement you should be fine. Of course – check with your HR department to make sure. :)

  6. Teresa Walsh says

    I am considering enrolling in the FSA with my company, this may sound like a stupid question, but, if the money is put on a debit card, why would I need a reimbursement request form? Wouldnt I just be able to present the debit card to the receptionist for co-pays in the doctors office, or in the pharmacy for co-pays? Please Help!!!!!! Nobody seems to know the answer here in my office, and I dont want to go to HR and sound like a knucklehead…..Thanks!!

  7. Carrie says

    I would advise anyone to think twice about trusting their money to FSA – I have had a terrible time with mine. Just trying to pay an overpayment is literally IMPOSSIBLE. And everyone I speak to there are complete morons. They don’t seem to want my money. Never again. I trust my credit cards to pay my medical bills in the future. Much easier./

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>