What’s covered by a Flexible Spending Account?

It’s Open Enrollment time at many employers right now, and will that can mean figuring out what has increased, changing health insurance plans, and spending a night or two reading and sorting out options it also means it’s time to decide how much to put in your flexible spending accounts.

A flexible spending account (FSA) comes in two “flavors”. Dependent Care and Health Care. In both cases you set aside your pre-tax dollars to spend on specific expenses. This means a lower tax burden, and in most cases you end up spending 20-25% less on those expenses than you otherwise would.

HealthCare FSAs

photo credit: Dominique Godbout

Benefits of Health Care FSAs

One of the biggest benefits of using a health care FSA is you can get paid back before you put money into your account. If I plan to put $2,500 in my account for instance but have a $1,000 medical bill due for services performed in January I can still pay it in full, I don’t have to wait until I have $1,000 in the account. You could think of it as being able to take a tax free loan from yourself to cover medical expenses.

If you chose not to use a FSA you have to rack up 7.5% of your AGI (adjusted gross income) before you can expect to get any money back in the form of a tax break.

What expenses are covered by Health Care FSAs?

Eligible expenses include co-pays for doctors and other health care providers (chiropractor, dentist, etc.), deductibles, co-insurance (IE you pay 10% of a medical bill), and many other expenses. You can use your health FSA to cover the purchase of glasses, contact lenses, and even dental expenses. For a full list of what is covered, check out IRS form 969.(opens a PDF doc)

The biggest change in 2011 is that over the counter healthcare expenses will no longer be eligible for reimbursement without a prescription. That means no more stocking up on first aid kits and band-aids at the end of the year.

Challenges of Health Care FSAs

The main challenge with a FSA is knowing how much you should set aside for your account for the year. In most cases if you don’t use it, you lose that money, so it’s a little risky to throw a ton of money in it without looking at some data.

How much should I put in my Health Care FSA account?

If you use your past year’s expenses as a barometer that’s a good starting point, but you should really consider looking at the last several years to get an average. You may also have increase in co-pays or deductibles this year which should also be factored in.

For instance if your co-pays go up from $15 to $25 and you went to the doctor on average 10 times each year (for all family members) you should pad your FSA with an extra $100.

You can also factor in expected expenses such as braces for your teen, annual physicals, or planned procedures you may have put off until 2011.

You won’t necessarily get a perfect number by doing all the math, but it should get you close.

How do I spend my leftover Health Care FSA money if I contribute too much in in 2011?

If you find at the end of 2011 that you have a little extra FSA money you should consider how you would spend it before you decide what your contribution for 2011 will be.

If you or a family member wears glasses or contacts you can always bank on stocking up at the end of the year. One year my husband and I each bought new glasses on December 31st. I’ve even used our FSA for prescription sunglasses which seems like a luxury, but really is a necessity if you need to wear glasses full time or for driving (that’s me). You can always opt for pricier frames to spend that money.

Dependent Care FSAs

photo credit: goldberg

What expenses are covered by Dependent Care FSAs?

Dependent Care FSAs cover expenses for dependents. You can use them to cover daycare, babysitting, and preschool for younger children if you use that time to work. You can also use a dependent care FSA to cover after school care (again if you’re using that time to work). Dependent Care FSAs also cover elder care if you have a daycare or service you use to help with caring for an elder that you claim as a dependent.

What expenses aren’t covered by my Dependent Care FSA?

You can’t use a Dependent Care FSA to cover summer camp, or care for a dependent that lives elsewhere. (IE an elderly parent in a nursing home)

Challenges with Dependent Care FSAs

Dependent Care FSAs do not offer you the option of getting a large chunk of money at once. They are set up to pay you back as you pay in, so that may mean you have to pay tuition or daycare expenses at the beginning of the month and submit and get your money back at the end of the month limited to what you’ve contributed so far.

How much should I put in my Dependent Care FSA?

This calculation should be more straightforward. You usually know these expenses ahead of time, and in most cases it should be clear cut. If you work while you child is in preschool for instance then you can put the full tuition into your FSA.

Should I use Flexible Spending Accounts?

In my research for our family I found that the Health Care FSA made a lot of sense for us. We have various co-pays, and we know we’ll be spending a bit on braces this year, as well as glasses for four and potentially five of us this year. We also tend to spend a good amount in healthcare expenses, but we never get beyond the 7.5% of AGI (adjusted gross income) so a FSA gives us additional tax savings.

On the other hand the dependent care FSA doesn’t make as much sense. While I do work while my youngest is in preschool we pay our fee in a lump sum which saves us money, but also means we would have to get it back in chunks over the year. When I looked at taxes I realized by taking certain deductions we would get the same effect without the hassle of sending in forms each month.

It may work out differently for your personal situation. Run your own numbers, and see what makes sense. If you have questions about your plan seek advice from human resources, and if you have questions about tax benefits check with you financial advisor.

Do you use a FSA? Will you be contributing less this year due to changes in what you can spend on for health care FSAs?

Kelly

About Kelly

Kelly Whalen is the founder of The Centsible Life, a blog where motherhood and money meet. Her goal is to help readers live well on less. Kelly is a mom to 4, and loves that she can stay at home with her kids, and still pursue her passions for writing, personal finance, and social media. You can often find her on twitter and Facebook talking money and motherhood.

Tagged as: dependent care, flexible spending accounts, health care, money

Sheila

I get Rx massages, too, Kelly, and they definitely aren’t relaxing, but are beneficial. My LMT gives me a “spa massage” with scented oils every December as a gift. I look forward to that! I use the max medical FSA and, sadly, never have a problem with leftover money. My doctor has written Rx for vitamins and a gym membership for me so getting that reimbursed through the FSA is helpful.
http://www.lookinggoodmom.com Liz

I have always used a dependent care FSA, as a full-time working mom. I have been able to use summer camp bills for reimbursement, but you can’t after the age of 13, or if the caregiver doesn’t work or attend school outside the home. So if there is a stay-at-home or work-at-home caregiver, then you are likely ineligible for a dependent care FSA. It’s also important to know that if you pay a babysitter to watch your children, you CAN report it, but the babysitter can’t be a dependent 19 or under, and they need to be reporting the income (and you both need to be paying payroll taxes).

We did a medical FSA this year as well. Our medical expenses are a bit unpredictable, and I always worry about leaving some money on the table, but there is a breakeven point where you can still have a net positive impact, even if you left some money in the account at the end of the year. This year, ours is going to pay for my daughter’s orthodontic care. We have great insurance but will still owe about $1,800.
http://www.lookinggoodmom.com Liz

I have always used a dependent care FSA, as a full-time working mom. I have been able to use summer camp bills for reimbursement, but you can’t after the age of 13, or if the caregiver doesn’t work or attend school outside the home. So if there is a stay-at-home or work-at-home caregiver, then you are likely ineligible for a dependent care FSA. It’s also important to know that if you pay a babysitter to watch your children, you CAN report it, but the babysitter can’t be a dependent 19 or under, and they need to be reporting the income (and you both need to be paying payroll taxes).

We did a medical FSA this year as well. Our medical expenses are a bit unpredictable, and I always worry about leaving some money on the table, but there is a breakeven point where you can still have a net positive impact, even if you left some money in the account at the end of the year. This year, ours is going to pay for my daughter’s orthodontic care. We have great insurance but will still owe about $1,800.
Trina Oboyle

My husband and I were just talking about ways to spend our flexible spending, thanks for this article.
Trina Oboyle

My husband and I were just talking about ways to spend our flexible spending, thanks for this article.
http://www.theproductivemom.com The Productive Mom (Grace)

Kelly, great post. We have been using our FSAs for awhile now – at minimum 5 years. Another way to consider why it’s worthwhile to participate in an FSA is to imagine saving your tax bracket worth of money for a small inconvenience of paperwork – since the money is taken out pre-tax, you won’t be taxed on those dollars. Most employers who do offer FSAs do not charge above the cost of the plan for it so it feels like a waste not to utilize it. But if you want to stay on the conservative side for the first year, set aside the minimum you know you will spend that year – prescription drugs, doctor’s visits that are not covered, and so on)

This year, we optioned to move one level down from our previous plan. The premium plan just started becoming too pricey for what we utilize. Our medical bills are fairly predictable now and even if one of us were to have a major hospitalization (knock on wood), the deductibles are still low enough that it will be met before we over-extend ourselves comparative to paying the premium level. It will be interesting to see how things go with this change.
http://www.adailypinch.com/ Lisa

This was fantastic. We use ours, a lot. But, never make it to that 7.5%. Ours is so picky though, that even with the card, you had better have every stinking receipt. You never know when they are going to deny a $20 co-pay or the meds for your son that you buy every single month.
Kathleen

Great article! I have been using one for about five or six years now – love having that card for those medical purchases and it has saved us in a bunch of instances. A little disappointed (more than a little!) at the coming changes in January – especially with two small kids who between illness and things like teething could go through a bottle of Kids Tylenol or Motrin in no time. But I guess we have to make do. I am wondering (haven’t found the info yet) about whether my saline solution for my contacts will be covered? And as for a way to use up the dollars, my husband and I will also be seeing our chiropractor more next spring!

http://www.thecentsiblelife.com/ Kelly Whalen

Kathleen, my guess is the saline solution won’t be covered since you don’t need a RX to purchase it.

We love having a card, it’s been 2 years for us, and I LOVE it so much more than submitting receipts.

Oh yes, we visit the chiropractor on a semi-regular basis with the whole family, so we could always add more chiro visits. Fortunately for me I also get RXed massages. (they aren’t very relaxing, but it’s still a massage!)