In an economy in which everyone is striving to stretch a dollar further than ever, putting pre-tax dollars into Flexible Savings Accounts, FSAs, can help defray the cost of items already in your budget. Whether employees take advantage of the health care, dependent or commuter accounts, or all three, FSAs offer workers a way to get a bigger bang for their buck.
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An employer-sponsored benefit, FSAs, also known as Flexible Spending Accounts, allow employees to pay for eligible out-of-pocket health care and dependent care expenses with pre-tax dollars.
“At a time when Americans are looking for ways to cut their health care costs, it’s important that employees take advantage of all the benefits available to them,” says Joe Jackson, CEO of benefits provider WageWorks, Inc. “Flexible spending accounts are designed to help Americans save up to 40 percent on the health care they need and already pay for out of their own pockets.”
Contributions made to FSAs are deducted from paychecks before any taxes are calculated and are not reported to the IRS, thus decreasing taxable income and increasing disposable income, which can save consumers hundreds or even thousands of dollars each year.
Employees can elect the amount they’d like to contribute during the annual open enrollment period, which typically begins in November for the following year. Employees must reenroll every year and, at that time, may change the amount they’d like to contribute if they wish to do so.
Manisha Thakor, author and finance expert, says even she did not grasp how important flexible spending accounts are until she began working for herself and lost the benefit. The self-described “personal finance junkie” likens it to refusing a 40 percent off coupon while waiting on line at a store.
“Flexible savings accounts are today what the 401(k) match was 10 or 15 years ago, where people didn’t grasp that this free opportunity was sitting there,” she says. “You become so heightened to it when you work for yourself.”
As of 2010, 85 percent of companies with 500 or more employees offer FSAs, according to a Mercer survey. Yet, despite the fact that FSAs can save workers a bundle depending on their tax bracket, only one in five employees participates.
Thakor thinks the number one barrier that keeps people from jumping in is the “use it or lose it” stipulation, which states that any funds in the account not used by December 31 return to the employer. Although studies show that of those participants who don't use all the funds they've set aside the average amount lost per person is $85 annually, Thakor says the issue is one thing that stops people in their tracks.
“Because the list is so robust of the things that are covered, with a little advance planning there’s no reason why you would need to lose anything,” she says.
Bonnie Zelter, WageWorks' director of marketing, agrees that no funds need to go to waste.
“We have calculators and tools to help people make decisions, but a good exercise is to review in detail the last 12 months of spending on out-of-pocket medical expenses, and child/elder care expenses, and consider unusual events upcoming, such as children needing braces,” Zelter suggests. “Where people are cautious because of the ‘use or lose’ concept, they can ‘start small.’ If this year the FSA account is spent down by June, then next year, increase the election a little more.”
Surprises abound on the list of eligible expenses and Zelter shares the top three employees often don’t know exist:
- Capital expenses - Certain improvements made to accommodate a home to your disabled condition, or that of your spouse or your dependents who live with you.
- Weight-Loss Programs - You can include in medical expenses amounts you pay to lose weight if it is a treatment for a specific disease diagnosed by a physician (such as obesity, hypertension, or heart disease). This includes fees you pay for membership in a weight reduction group as well as fees for attendance at periodic meetings.
- Car expenses - You can include out-of-pocket expenses, such as the cost of gas and oil, when you use a car for medical reasons. You cannot include depreciation, insurance, general repair, or maintenance expenses though. If you do not want to use your actual expenses you can use the standard medical mileage rate, which for 2011, is 19 cents per mile. You can also include parking fees and tolls.
Other often-overlooked but eligible items include birth control, childbirth classes, smoking cessation programs and speech therapy.
Dependent Care: It’s Not Just for Kids
For the sandwich generation, those caught between caring for aging parents and young children simultaneously, FSAs can help ease the financial burden.
“For years people always thought about it as childcare,” Thakor says, “but technically it’s dependent care.”
Thakor says people need to be cognizant of how wide-ranging that definition of “dependent” is.
“It goes up, and not just down, in age,” she points out. “With parents living longer and needing more help, many people need to put that benefit to work for them.”
Things like work-related custodial care, adult day care, as well as transportation to and from eligible care are all expenses that can be paid for with pre-tax dollars.
For younger dependents, benefits include nannies and nursery school in addition to before and after school extended care programs.
“I was pleasantly surprised that (day) camp tuition was considered an eligible expense in the Dependent Care FSA program,” says Jeffrey Ralston, 42, of Livingston, NJ, who estimates that FSAs save him $2,500 annually. “Before looking at the list of eligible items, I had assumed that only daycare costs qualified under the program. Given how expensive some camps are, being able to use pre-tax funds definitely helps to make camp tuition more manageable.”
Jeremy Vohwinkle, author of the personal finance blog, Generation X Finance, offers advice to those looking to make the most of this benefit.
“Keep good records and stay on top of your claims,” he says. “This is one of the biggest issues I see when people struggle with their FSA. In most cases, it is up to the account owner to keep track of spending and file claims. So it's very important to keep any and all records and file the claims promptly.
“If you don't, then it often piles up near the end of the year and you have a mountain of paperwork to sort through to get your claims in on time. Or worse, you lose receipts or forget about old expenses. In addition, there are deadlines to deal with so you want to make sure everything is taken care of quickly so you aren't faced with the possibility of letting money go to waste,” says Vohwinkle.
Commuter Costs
Commuter benefits can help employees fight ever-increasing fuel costs. Limits, set by the IRS, are currently $230 per month for parking and the same again for transit, Zelter says.
“I think a lot of people are really looking for alternatives in the face of rising gas prices, especially (now that) we’re in the summer season,” Thakor says. “I think that this is a benefit that often times people are just not aware of, whether it’s parking in a city that you absolutely have to have or public transportation costs in cities that are amenable to that.”
Unlike the other types of pre-tax benefits, like health care FSAs, which limit your ability to sign-up to just once a year during open enrollment period or when you experience a qualifying life event, such as the birth of a child, commuter accounts can be changed on a monthly basis throughout the year, Thakor says, making them that much more flexible.
Upcoming Changes
The Health Care Reform Lawwill change some of the current FSA rules. As of the first of this year, FSA participants are now required to get a doctor’s prescription to use pre-tax dollars to purchase over-the-counter drugs, something many are grumbling about, says Thakor.
Often, participants made end-of-the-year trips to pharmacies and even superstores to load up on band-aids, cold and flu formulas and contact lense solution as a way to use up dollars that might have otherwise been forfeited.
“It’s an added layer of complexity,” says Thakor, who recommends that employees sit down with their doctor during their annual visit and ask for a prescription for everything they might need for that coming year. “The extra amount of work involved is so small time-wise relative to the benefit saved, but it’s just a mental barrier.”
Annual contributions will be capped at $2,500 starting in 2013, down 50 percent from the current average of $5,000, set by individual employers. So, if you’ve had your eye on an elective procedure, such as LASIK eye surgery or braces for yourself or your child, start planning now.
Thakor believes that even with these changes, FSAs are an excellent way to cut costs. “If people saw the list, they would be blown away. I am hard-pressed to think of a description of a person who would not benefit from at least one of the three buckets: individual, dependent or commuter. It’s really hard for me to come up with a profile of somebody who couldn’t have some at least economic benefit from participating in a plan,” Thakor reasons.
For those with the option of setting aside pre-tax dollars and who are willing to do a little bit of advanced planning, FSAs offer a way to put more cash in your pocket right now.