Save Money with Flexible Spending Accounts
Take Advantage of Tax Free Benefits on Health Expenses
Nov 10, 2009
The downturn in the economy has caused a shift in consumer spending habits. This increased interest in saving money has also increased interest in Flexible Savings Accounts offered by employers.
What Type of Expenses are Eligible for a Flexible Spending Account?
According to Internal Revenue Service website, a Health Flexible Spending Account (HSA) allows employees to be reimbursed for medical expenses. These flexible savings accounts allow employees to set aside pre-tax money that is used for qualifying medical expenses. The money is withdrawn from the employee’s paycheck before the taxes are taken out, thus providing the tax free benefit. There is also a second type of Flexible Spending Account called a Dependent Care Flexible Savings Account.
The IRS provides a complete list of all medical expenses that qualify for Flexible Spending Health Accounts, however not all employers allow every item. For that reason, employees should obtain a complete list of qualifying expenses from their Human Resources department.
How to Calculate How Much Money to Put into a Flexible Spending Account
Employees must calculate how much money to place into an FSA at the beginning of the plan year. Employers then deduct the allocated amount in equal amounts from each paycheck. Although the IRS does not limit the amount of money individuals can put into a flexible savings account, employers sometimes do.
To determine how much money to set aside in a FSA identify the following medical expenses for the upcoming year.
- Any dental care for all household members such as braces, dental cleanings or other dental procedures. Note that cosmetic dentistry is usually not eligible for flexible spending savings.
- Add up all prescription medication co-pays, as well as prescription not covered by insurance.
- Include the cost of eye exams, glasses, contact lenses and contact lens solution.
- Estimate how much the household spends on over-the-counter medication per year such as allergy medication, cold and flu remedies and first aid items.
For all of the above expenses, estimate how much the insurance companies will pay and deduct that from the amount in the flexible savings account. Only set aside the estimated out of pocket payment for medical expenses.
What Happens to Unused Money Left in a Flexible Spending Account?
One downfall for Flexible Spending Accounts is that any money left in them at the end of the calendar year is usually forfeited. Thus, it is better to underestimate than overestimate medical expenses. The IRS does allow a two and one half month extension at the end of the plan year to allow employees to use up excess money. However, it does not mandate that companies allow this and some companies choose not to. In these cases, any leftover contributions by employees are forfeited.
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