Ouch – another medical expense, and just as painful is trying to decipher your health insurance plan. Your premium covers things you’ll never use, yet many of your medical needs are excluded. The topic is so complex that for many, it may as well be a foreign language.
But what if your employer told you that things like laser eye surgery, wheelchairs, fertility treatments or orthodontics could be paid for at about 70 cents on the dollar? Would that speak to you? It does for many, by way of a flexible spending account (FSA).
Created in the 1970s by the IRS to counter rising health costs and increasing exclusions from health insurance plans, FSAs allow you to set aside, tax-free, a portion of each paycheck to be used for qualified medical expenses not covered by your insurance plan. You pay no payroll tax or income tax on this money. It is just an off-the-top deduction from your gross earnings, which on average amounts to a 20 to 50 percent savings on each dollar, depending on your tax bracket.
Currently, there are about 24 million FSAs nationwide. Despite their success, only about 35 percent of employees who are offered the benefit take advantage of it. It’s too complex, they say. They are afraid of the possibility of losing their unused funds. They are distrustful of the administration of the funds. If you have declined to participate for any of these reasons, or because it is all too confusing, here’s help:
An FSA Q & A
What types of medical expenses are covered by an FSA?
A broad range of services and treatments are eligible for payment from your FSA, including chiropractic care, dental treatment, contact lenses, Braille reading materials, hearing aids and many more.
The IRS establishes the parameters of an FSA and regularly updates and redefines “qualified” expenses.
View a list of eligible products and services.
How do I start using an FSA?
Your employer will have a plan period, usually a year, but possibly expanding to 15 months, which starts in January. Before the period begins, you will be asked to declare an estimated amount of money, up to $2,600 per year, to set aside for your anticipated expenses.
You may receive a pre-funded debit card containing your designated value. Or you may be required to pay your bills up-front and submit receipts for reimbursement from your employer.
What is the difference in FSA and HSA?
Unlike an FSA that is administered by your employer, a Health Savings Account (HSA) is owned by you and stays with you. Your contribution does not have to be spent according to a timeline, can grow as any savings account would, and can even be invested. An HSA, however is more closely tied to your health insurance plan and is only possible if it is accompanied by a qualifying high-deductible policy.
For a detailed comparison, visit the IRS website.
Does my employer benefit from my FSA?
Yes, employers save money with FSAs by not paying wage taxes on FSA contributions. Each $100,000 of salary set aside by employees toward their FSAs saves an employer $7,650 (7.65 percent) in payroll taxes. Thus, an FSA is a win-win proposition for you, as well as your employer.
Are there disadvantages to an FSA?
Before Obamacare was enacted, one significant disadvantage to using an FSA was that funds not used by the end of the plan year were forfeited to the employer, known as the "use it or lose it" rule. Under the terms of the Affordable Care Act, however, an employer MAY allow a carryover up to $500 into the following year.
Still, based on the nuances of your FSA, it would be wise to track your medical expenses and estimate the amount of your yearly contribution as accurately as you can.