How FSAs Maximize Your Employment Benefits
We all know that budgeting, saving, and investing are basic elements of sound financial planning, but sometimes we overlook things that can have a profound effect on our financial situation. Employer-provided benefits are a prime example.
Flexible spending plans, 401(k) plans, Section 125 cafeteria plans (which have nothing to do with eating at work!), group insurance plans, even vacation benefits must be understood in order to work to your best advantage, and therein lies the problem. These benefit plans can be complex and confusing, and our employers don't always explain them well enough to allow the average person to make the best choices for their personal situation.
Let's demystify employment benefits, beginning with flexible spending plans.
What Is a Flexible Spending Account?
A Flexible Spending Account (FSA), also called a flex plan or reimbursement account is an employer-sponsored benefit that allows you to pay for eligible medical expenses on a pre-tax basis (there are also similar accounts for dependent and child-care expenses).
If you expect to incur medical expenses that won't be reimbursed by your regular health insurance plan, you should be taking advantage of your employer's FSA if one is offered.
How Does an FSA Benefit You?
An FSA saves you money by reducing your income taxes. The contributions you make to a Flexible Spending Account are deducted from your pay BEFORE your Federal, State, or Social Security Taxes are calculated and are never reported to the IRS. The end result is that you decrease your taxable income and increase your spendable income. You can save hundreds or even thousands of dollars a year.
How Does It Work?
At the beginning of the plan year (which usually starts January 1st), your employer asks you how much money you want to contribute for the year (there are limits).
You have only one opportunity a year to enroll unless you have a qualified "family status change," such as marriage, birth, divorce, or loss of a spouse's insurance coverage. The amount you designate for the year is taken out of your paycheck in equal installments each pay period and placed in a special account by your employer.
As you incur medical expenses that are not fully covered by your insurance, you submit a copy of the Explanation of Benefits or the provider's invoice and proof of payment to the plan administrator, who will then issue you a reimbursement check.
What Expenses Are Eligible for Reimbursement?
Any expense that is considered a deductible medical expense by the Internal Revenue Service and is not reimbursed through your insurance can be reimbursed through the Flexible Spending Account. Examples include:
- Fees paid to doctors, dentists, surgeons, chiropractors, psychiatrists, psychologists, and Christian Science practitioners
- Contact lenses and eyeglasses
- Fees for hospital services, qualified long-term care services, accident and health, and qualified long-term care insurance premiums, nursing services, laboratory fees, prescription medicines and drugs, and insulin.
- Acupuncture treatments
- Inpatient treatment at a center for alcohol or drug addiction
- Smoking-cessation programs and prescribed drugs to help nicotine withdrawal
- False teeth, hearing aids, crutches, wheelchairs, and guide dogs for the blind or deaf
- Fees in excess of reasonable and customary amounts allowed by your insurance
- Cost of vasectomies, hysterectomies and birth control
- Non-elective cosmetic surgery
- Co-payments on covered expenses
- Prescription drugs or prescription co-pays
How Do You Decide How Much to Contribute?
It's important to give some thought to calculating how much money to contribute for the year because if you put in more money than you need, by law, you lose it. You have three months after the end of the calendar year to submit claims for eligible expenses incurred during the previous calendar year. Any money left in your account after the three months will be forfeited.
To determine how much to contribute, make a list of the expected out-of-pocket medical expenses for you and your dependents for the next year. For example, if you always exceed your deductible, include the deductible amount in your calculation. Be conservative so you don't risk forfeiting any money.