The Pros and Cons of Flexible Spending Accounts

The following post is from Christina of Northern Cheapskate:

Stethoscope

photo credit: Adrian Clark

This is often the time of year that employers start filling your mailbox with information about open enrollment.  Don’t treat this information lightly.  This is the one time of the year that you can make changes to your family’s health insurance plan, add life insurance or disability insurance, or set up a flexible spending account, so it is important to pay attention to your options.  You don’t want to miss out on an opportunity to save money.

One of the most critical decisions you can make during open enrollment involves funding a flexible spending account (FSA).  If you don’t know how a FSA works, it’s simple: You can set aside a portion of your earnings up to $2,500 (using pre-tax dollars) to use for certain health care expenses such as clinic co-pays, prescriptions, and deductibles. You can also set up a FSA for day care expenses.

Pros of a Flexible Spending Account

Because the money for your FSA, comes out of your paycheck before taxes, having a flexible spending account can help you lower your tax bill by reducing your taxable income.  This can be especially helpful for you if you don’t itemize your deductions each year.

What I like most about an FSA is that it forces me to budget for health care expenses – something that many of us don’t think about until we’re sick.  A little bit of money from every paycheck goes right to my FSA before I ever see it, so it’s there for us when we need it.

Many flexible spending accounts now use debit cards, which means that you don’t have to worry about paying for prescriptions or co-pays out of pocket when you’re sick.  It’s pretty convenient to just swipe the card.

Cons of a Flexible Spending Account

You have to use it or you lose it. The downside to a flexible spending account is that if you set aside $2,000 during open enrollment,  you must spend it all by the end of the year or you’ll lose that money. It is a risk that some people don’t feel comfortable taking.

Determining how much money to put into an FSA can be tricky.  You have to spend some time evaluating your health care costs and projecting what they will be for the following year.  You’ll need to consider everything from your regular insurance deductibles to co-pays, prescription medications, and eyeglasses.  While there are FSA calculators available, it can be difficult to anticipate your health needs from year to year.  We’ve had years where we’ve had unexpected health issues that wiped out our FSA account early in the year.  And we’ve had years when we have had to find ways to spend the money before we lost it.

You have to keep good records.  Some FSA plans require you to pay the costs up front, and then you have to fill out paperwork and provide receipts in order to get reimbursed for those expenses.  If you have a debit card for your FSA, then you are often required to provide documentation for the health care services or prescriptions for which you used the debit card. Regardless of your plan, you must keep all of your receipts for claims you make against your FSA in case you are ever audited.  You’ll need proof that you used your FSA on qualifying health care or you could end up paying fines and back taxes.

We’ve used a flexible spending account for several years now, and have found that the positives outweigh the negatives of having one.  Just do your homework, keep good records, and you’ll be glad you’ve planned ahead for healthcare expenses.

Do you have a flexible spending account?  How do you determine what to contribute to it?

Christina Brown is the creator of Northern Cheapskate, a blog dedicated to frugal living through coupons, freebies, and money-saving ideas. She lives in the rural north woods of Minnesota where she clips coupons, pinches pennies, and chases her three boys (a 7-year-old and twin 5-year olds) as a stay-at-home mom.