FSA question

[Pembo]

I'm researching a flexible spending account for medical. Help me break it down. The employer takes a set amount of pre-tax dollars from dh's pay and puts it in a savings account that we can use during the year for medical expenses. Then we are unable to deduct those medical expenses on our taxes. But if we don't use up the savings account, we lose it after March of the following year.

Conversely, if we take a set amount out of our pay and put it in savings for med expenses, we can use the money for anything we want and can still deduct medical expenses. But we pay more in taxes.

Do I have that right? I'm not really seeing the benefit to having more deducted from our pay thus decreasing our cash flow to save a few tax dollars.

Any comments welcome please...

 

[msmayor]

The FSA is great for those who may not ever have enough to get the medical deduction for federal purposes. Only medical expenses that exceed 7.5% of your AGI are deductible. With an FSA, there is no threshold.

We put about $1500/year in our FSA and easily spend it all. Deducted in equal installments over the 12 month period, it saves us about $300 in taxes.

Its a relatively painless way to save for copays and prescriptions. In addition, I can spend MORE than the money already put in early in the year without worrying about making up the difference.

For example, in January if I have a big copay to make for a doctor visit, MRI and prescription, that could cost around $200. Even if I only have $50 put in the account I can charge the $200 on the Visa card attached to my FSA and it is paid...with nothing coming out of my pocket and no claim form to complete. The company knows that eventually it will 'catch up' with the contribution to make the funds available.

I actually look at it as a way to make my cash flow better. My medical costs are spread out over the whole year AND I end up with some extra tax savings.

 

[clh2]

The FSA's can also be used for dental expenses, glasses, contacts. And the "big one" - orthodontist.

Our out of pocket for DD's braces was about $3500. Assuming a 30% tax bracket - because that makes the math easier...I would need to have earined $5000 to net $3500 in take-home pay. I don't care how you slice or dice this - that was a huge savings.

 

[tripletots]

The flex accts. we've always had required us to use the money by Dec. 31 of that year, in this case 2011. We have until March of the following year to make a claim (send in receipts). I haven't had to mail recpts in for a couple of years since we were given credit cards attached to that acct. I love that because we don't have to pay out of pocket and wait to be reimbursed.

 

[Christine]

I'm researching a flexible spending account for medical. Help me break it down. The employer takes a set amount of pre-tax dollars from dh's pay and puts it in a savings account that we can use during the year for medical expenses. Then we are unable to deduct those medical expenses on our taxes. But if we don't use up the savings account, we lose it after March of the following year.

Conversely, if we take a set amount out of our pay and put it in savings for med expenses, we can use the money for anything we want and can still deduct medical expenses. But we pay more in taxes.

Do I have that right? I'm not really seeing the benefit to having more deducted from our pay thus decreasing our cash flow to save a few tax dollars.

Any comments welcome please...

I take $5,000 a year out for an FSA. This lowers my taxable income by $5,000. Not sure what that nets out to me but between my 401K deduction and my FSA (and for other people the dependent care account), you can significantly lower your income as reported to the IRS. In many cases you can lower yourself into the next lower tax bracket and really decrease your tax percentage. That is the savings. You are pretty much "sheltering" that income from taxes.

If it doesn't give you a decent savings and change in tax bracket, it might not be worth all the fuss for you. For me, there is no way my medical expenses could ever exceed the 7.5% threshhold (of which I'm very thankful for!). The FSA is one of the few perks I'm allowed.

 

[Pembo]

Another question - our actual cash on hand will decrease however...so we would need to be able to handle a deduction in each paycheck for this to work right?

I see the tax benefit what I don't see is the cash flow benefit when we don't have much excess to work with.

comments?

 

[msmayor]

Another question - our actual cash on hand will decrease however...so we would need to be able to handle a deduction in each paycheck for this to work right?

I see the tax benefit what I don't see is the cash flow benefit when we don't have much excess to work with.

comments?

OK...you say you don't have much excess.

But what happens then if you have a string of medical expenses crop up in one particular month? Someone gets sick...visit to the doc $20 copay. Pharmacy, 3 prescriptions at $10/each, $30. Will you have $50 cash to pay that if your cash flow is tight? What if the doc wants a follow up in 2 weeks...another $20 copay. You're up to $70.

For some, that's a blow to the budget in a big way.

Does anyone wear eyeglasses? Vision care visit, $20 copay. Eyeglasses, another $100 or so after insurance benefits. Is there an extra $120 available?

The point is, if you are able to spare even $20 a paycheck ($40/month) that sets aside $480 for medical expenses. THEN when that $120 needed for eyeglasses comes along, you don't have to find it in your budget: its already there, set aside for you to use.

I wasn't sure how I'd feel by "giving up" $40-60 a paycheck for the FSA but honestly? After two or three paydays, it wasn't noticeable. After the first raise my husband got, even less noticeable.

But it sure was nice going to the eye doctor this year with both my kids needing new glasses and not having to find $450 somewhere to pay for it.

 

[MushyMushy]

Another question - our actual cash on hand will decrease however...so we would need to be able to handle a deduction in each paycheck for this to work right?

I see the tax benefit what I don't see is the cash flow benefit when we don't have much excess to work with.

comments?

Do you have regular medical expenses that you pay out of pocket for? Think about how much you spend in an average month on copays, prescription drugs, medical supplies, glasses, dental visits, etc. That would be coming out of your pocket anyway.

If you don't have these regular expenses, it might not be worth it for you if you don't have the excess. For us it's well worth it. I have about $50-100 I pay for prescription meds each month. We all get glasses every year. Several copays. I also take a lot of OTC meds (which now we'll need a prescription to get those covered under the FSA).

 

[laurie31]

Another question - our actual cash on hand will decrease however...so we would need to be able to handle a deduction in each paycheck for this to work right?

I see the tax benefit what I don't see is the cash flow benefit when we don't have much excess to work with.

comments?

This is money you are going to spend, regardless of whether it comes out of your checking account or your FSA. So the cash-flow thing is kind of irrevelent. If you put $3600 in your FSA, you might take home $120/month less, but you also have $120 less in monthly expenses to come out of that take-home pay.

Let's say you spend $3000/year on out of pocket medical/dental expenses. If you put that money in an FSA, you will save almost $1000 in taxes (depending on your bracket of course, 30% is just easy to work with, and a good average). Also, if you have a big expense in February, you can access the whole $3000 right then; if you're taking the money and putting it in savings on your own (post-tax) you only have 2 months' worth in February.

You just have to be careful to closely estimate your 2011 expenses, and not put more than that in your FSA - it's a "use it or lose it" account.

 

[Christine]

Regarding the cash flow thing: it is a hardship on some people. You have the amount taken out of your check and put in an account. But if you have to go to the doctor and pay a co-pay, at least for me, that comes out of my net income. I then have to submit a receipt or wait for the the reimbursement from my FSA. I could be out of that money for 2 weeks, worst case scenario. Even longer at my last company.

So, for folks living close to the edge, the FSA can be kind of hard and, for that reason, many people I know don't do it. It's hard enough to have another deduction every pay period, but then getting hit with the medical expense, plus the deduction and not getting your FSA reimbursement immediately can be tough.

 

[MushyMushy]

Regarding the cash flow thing: it is a hardship on some people. You have the amount taken out of your check and put in an account. But if you have to go to the doctor and pay a co-pay, at least for me, that comes out of my net income. I then have to submit a receipt or wait for the the reimbursement from my FSA. I could be out of that money for 2 weeks, worst case scenario. Even longer at my last company.

So, for folks living close to the edge, the FSA can be kind of hard and, for that reason, many people I know don't do it. It's hard enough to have another deduction every pay period, but then getting hit with the medical expense, plus the deduction and not getting your FSA reimbursement immediately can be tough.

That's true about reimbursements, but a lot of FSA accounts have a debit card you can use. That has come in extremely handy for us!

 

[DebbieB]

I had a spending account this year for the first time. Due to unexpected medical expenses, I used the balance by July. So they are still taking the same amount out per paycheck but they reimbursed me the full balance by July. So I got the money back before I paid it in. It's good for me because I don't itemize deductions.

 

[Christine]

That's true about reimbursements, but a lot of FSA accounts have a debit card you can use. That has come in extremely handy for us!

The debit card sounds great. I work for the Federal government now (which is usually "ahead" on this stuff) and we have no debit card for our FSA. The best you get is, if you have your health insurance through the government's plans, the amount you spend on your co-pay or prescription costs is immediately transmitted to your FSA account. Most people get reimbursed within a week.

I don't purchase health insurance through the federal government as we use my husband's plan. So whenever I have an expense, I must wait for an explanation of benefits before I can submit. Once I submit, it takes them about 2 days to acknowledge my claim and show what they are accepting and then anotehr 5 days for my reimbursement. It's a long process on a doctor's visit. For prescriptions, I can submit right away, but then it is at least a week for repayment.

 

[scdak]

I was skeptical about a FSA too, but decided to see if it would be beneficial for me this year, if I didn't like it, I could opt out of it in a year. WHile I don't know about the tax savings yet, I can say that I loved having the debit card to use for the expenses, it was loaded with my set amount in January and I went through most of it by June, just finished it off yesterday in fact. I didn't notice the biweekly deduction after a few paychecks. I am disappointed that the new rules for 2011 eliminate the option of using it for OTC meds, I know that there is a option to have a prescription written, pay for it and then be reimbursed but that sort of defeats the purpose of having the debit card that means you don't pay out of pocket and then have to wait until the company decides to send you the money back.

As others have said, think hard about your expenses that you have paid out this year, underestimate what to have put in the account and you will be fine, as you know if you don't use it you lose it. But you will be surprised how fast it all adds up if you think about all deductibles you have paid this year, prescription meds your have purchased, eye glass expenses etc.

 

[Pembo]

Regarding the cash flow thing: it is a hardship on some people. You have the amount taken out of your check and put in an account. But if you have to go to the doctor and pay a co-pay, at least for me, that comes out of my net income. I then have to submit a receipt or wait for the the reimbursement from my FSA. I could be out of that money for 2 weeks, worst case scenario. Even longer at my last company.

So, for folks living close to the edge, the FSA can be kind of hard and, for that reason, many people I know don't do it. It's hard enough to have another deduction every pay period, but then getting hit with the medical expense, plus the deduction and not getting your FSA reimbursement immediately can be tough.

In looking at the plan available to us, we would have to pay out of pocket and then wait for the reimbursement.

It would be easier to take the deduction IF my husband got a raise. But that isn't happening.

I think for now, an FSA isn't right for us. Thanks everyone.

 

[Green Tea]

If you have medical expenses that exceed 7.5% of your income, I can not imagine why you wouldn't be putting the maximum into a FSA. It is basically a 30% discount on every medical expense.

 

[LisaNJ25]

I have no idea what it saves us but I look at it as a medical payment plan. We have the debit card and our full amount is available 1/1.

So the amount gets spread out over the year I dont have to worry about coming up with a large chuck in one shot.

 

[Christine]

In looking at the plan available to us, we would have to pay out of pocket and then wait for the reimbursement.

It would be easier to take the deduction IF my husband got a raise. But that isn't happening.

I think for now, an FSA isn't right for us. Thanks everyone.

I understand. When you are very tight financially, it is hard to put that expense out twice and have to wait a few weeks for reimbursement. I know at my last company that a few employees on the lower end of the pay scale with families just couldn't do it.