Flexible Savings Accounts: Are They Worth It?

There are certain expenses that we all need to budget and allocate monies for. Among these essential items are costs related to our physical welfare, with health care front and center. Flexible Savings Accounts (FSA) allow individuals to save money tax-free for future health care needs.

Read on to learn about the function and benefits of FSAs and determine whether they are worth using for you and your family.

What is an FSA?

An FSA is a pre-tax savings plan which allows you to set aside monies for future health care needs. These are established by your place of employment, and both employees and employers can contribute monies to these accounts.

The maximum that you can contribute to your FSA each year is $3,200. Employer contributions have no bearing on the amount that you can contribute.

Similarly to a Traditional 401(k) or Traditional IRA, these are pre-tax monies, meaning that the amount contributed will be deducted from any income tax obligations for the year. In other words, if you contribute $2,500, your taxable income will be decreased by this same amount.

The money in the FSA can be used to pay for medical-related expenses for you, your spouse, and any dependents listed on your tax return.

In practice, you will pay for these health care costs directly. Afterwards, you will submit a claim to your FSA through your employer with proof of both the expense and a statement that it was not covered by any existing insurance. You will then be reimbursed for these qualifying expenses from the money that is in your FSA.

What are the Benefits of an FSA?

An FSA incentivizes putting money aside for healthcare-related costs. In this sense, it provides two main benefits.

For starters, an FSA allows you to decrease your taxable income. This will add cash to your accounts when it comes time to pay Uncle Sam.

Second, as with any budget, an FSA encourages you to set money aside for essential costs. Because the contributions are often automatically deducted from your paycheck, FSA’s will decrease your take home pay. This prevents these monies from being used for consumption, and helps you stay within the confines of your budget (be it 50-30-20, or whichever framework that you choose).

Many elect to contribute the amounts on a monthly basis throughout the year from their paychecks. However, you will have access to the total amount that you intend to contribute for the tax year from the outset, a nice perk that allows you to pay for healthcare-related expenses even before you have set the money aside to do so. Certain employers will even contribute monies to your account, though not every employer will offer this benefit.

Another advantage of an FSA is that it is compatible with almost every health plan.

What are the Drawbacks of an FSA?

There are two principal drawbacks of an FSA.

The first is that it is a use-it-or-lose-it account. In other words if you do not use the funds in your FSA by the end of the year, you will lose these monies. Our plans do not always work out, and you may find yourself racing around the last week of December to purchase band-aids and other medical accessories in order to prevent your contributions from going to waste.

To make this cut-off less harsh, some employers will offer a two-and-a-half month grace period until March 15th of the following year to use the funds in your FSA. Employers can also allow you to carry over $640 into the next year. However, neither of these benefits are requirements, and each employer can only offer one of these two options.

The other disadvantage is that the money in your FSA cannot grow. The contributions from you and your employer are the maximum amount that will remain in the account, sitting there without accruing interest until you elect to draw upon them.

Are FSAs Worth It?

The central question when considering an FSA is whether or not you will use the monies that you have committed to it. In other words, will your healthcare costs that are not covered by insurance match the funds you–and possibly your place of employment–are devoting to your FSA?

While this can be difficult to fully predict, there are a couple items to consider.

First, think about your out-of-pocket healthcare costs from previous years. While past is not necessarily prologue, looking at your historical costs can give you a decent sense of the amount that you generally spend on healthcare.

Second, think about whether there is an expensive medical need on the horizon that will alter your household budgetary needs. For instance, you may be expecting a new baby, or perhaps your teenager is about to embark upon a multi-year orthodonture adventure. In these cases, setting aside money for these likely costs makes good financial sense.

If used correctly, an FSA can help to turn these medical costs into slightly less painful outlays of capital. Another way to think about the merits of an FSA is the following: a great deal of healthcare costs are simply non-negotiable. If you can reasonably predict your future costs for the coming year and align your account accordingly, an FSA is probably worth it.

Conclusion: Taking Care of Yourself

The importance of taking care of the physical and financial existence of you and your family should be at the top of everyone’s set of priorities.

Eating right, exercising regularly, and drinking enough water are some of the more obvious actions to take. So is making sure to have money set aside to pay for healthcare-related costs.

FSAs are one vehicle which can help you do so. Hopefully, the coming year will bring good health for you and your loved ones. However, if it does not, making sure that you are covered can help provide some measure of comfort and security.

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