I've been employed full-time for more than a decade, and yet I still don't totally understand what a flexible spending account (FSA) is and why I should have one. I've written before about how I'm a good saver, but I'm not particularly mindful about money. And, like so many people, I'm crazy busy all the time — and thinking about health care costs is not on the top of my list of ways to spend my free time. But it's the season of open enrollment, and I'm pretty sure I'm not the only one wondering if I should be setting aside money each month in an FSA. So I did what I always do these days: I emailed Priya Malani and asked her to explain it me, so that we can explain it to you in a way that's helpful and will hopefully save you hundreds of dollars each year.
So what is a flexible spending account? As Priya explains it, an FSA allows you to set aside a portion of your salary before taxes to pay for potential medical expenses and dependent care costs not covered by insurance. You can set aside $2,500 for personal expenses and $5,000 for dependent care (daycare, a nanny, or home health care for an elderly relative). The money comes out of your paycheck once a month (or once a pay period — that depends on how your employer sets up the program) and accumulates on a credit or debit card provided by your FSA company (AmeriFlex or WageWorks, for example).
But how does that translate to savings? I still get stuck on how pre-tax dollars save you money in the long run. It's not like you get a check in the mail. But let's say you make $50,000 a year, and you put the full $2,500 into an FSA account. That means you'll only be taxed on $47,500; this handy FSA calculator estimates you'd save $988 in taxes. That's nothing to sneeze at.
It's not as simple as just setting aside $2,500, however — you actually have to spend all that money on health care and related products within 12 months, and you can only roll over $500. So if you don't spend $2,000 by December 31, 2016, you'll lose it. And then you've wasted money.
It's also important to note that you have to use the money on very specific items, and it's a little confusing to figure out what is covered and what is not. Some of it is obvious: You can pay for all those co-pays and any prescriptions with your FSA money. That's easy. It gets a little more complicated with over-the-counter medicine, such as Claritin or Excedrin. Your doctor will actually have to write you a prescription for these if you want to use your flex dollars on them. Kind of annoying.
There's a great list of all the different products you can use your FSA dollars on, here. Some standouts that we all frequently purchase: condoms, sunscreen, lip balm, contact lenses, and Band-Aids. Unfortunately, FSA dollars don't cover items like tampons or toothpaste. (Drugstore.com and Walgreens.com have a little FSA icon that indicates which items are FSA-approved, making shopping a little easier.)
So how do you figure out just the right amount to put into your account? You have to guesstimate. And that takes time — a lot of time. When I was trying to decide how much to set aside this year, I looked at a bunch of different numbers. I logged into my health insurance company's website to see how much my husband and I spent on co-pays this year. I pulled up old credit card statements to see how much I paid for new glasses and contact lenses. I scrolled through my bank account to see what I shelled out for those bi-annual dentist appointments. I added up the sums and played around with different amounts in the FSA calculator. And then, I mulled a little more. I like saving money, but I also worry that if I put too much into my account, I'll spend on dumb stuff (like a fancy First Aid kit) just to avoid losing anything. I think I've landed on a number that's right for me, but it's definitely on the conservative side. I feel okay with that, but everyone needs to make their own decisions.
In the end, I'm not 100% convinced that FSAs are worth your time and energy. Sure, you can save a little bit, but you have to be mindful of the money you put in the account and make sure you use the card to pay for qualified purchases. If not, you'll end up needing to file claims to your provider (yuck) or risk losing the funds at the end of the year (the worst).
But, if you see the doctor frequently, have several prescriptions you regularly fill, are having a baby in 2016, or anticipate any other major medical expense (Lasik, anyone?), an FSA can be a big money saver — if you have the time and energy to explore all your options.
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