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Your employer’s benefit package can include much more than health insurance, and you may not want to take advantage of every offer. Example: the flexible expense account, or FSA.
Whether it’s an open registration or you are starting to work at a new company that offers an FSA, you will want to know what it is and how to use it before you register. Depending on the extent of your health care costs, an ASP can help you save a lot of money on care. But if you contribute more than what you’ll need to spend on medical care this year, an ASP can backfire on you: all unused funds will be gone.
Here’s more on what FSAs are, if you should get one, and how to use one wisely.
What is a flexible expense account?
Also referred to as a flexible spending arrangement, an FSA (not to be confused with an HSA) can be used for medical expenses, dental care and vision care. The amount you decide to contribute to the account for the year is deducted from your pre-tax salary. This lowers your taxable income, saving you money on taxes. Depending on your benefit plan, your employer may also contribute to your FSA.
You will either have a debit card to pay medical fees as you go, or you will need to submit receipts and documents for reimbursement. You can use your FSA for your own medical expenses or expenses incurred by your spouse or any dependents that you claim on your taxes. You can also use FSA funds for any adult children in your health plan who will be 26 or under on December 31.
Unless you have a persistent health problem, some experts say flexible spending accounts may not be the best use of your paycheck. “With most healthy young people enjoying decent benefits, personal expenses would be quite low,” says Greg Szymanski, director of human resources at Geonerco Management in Seattle. “I would recommend that they take full advantage of something like retirement savings. If you’re in good health, an FSA doesn’t seem worth it. “
Other experts say an FSA is helpful for people with any level of health care costs. “It’s the simplest and easiest way to give yourself a raise,” says Kevin Haney, owner of ASK Benefit Solutions, a New York-based agency specializing in selling voluntary employee benefit programs. “Almost everyone has some level of unreimbursed medical expenses. Pre-tax money goes further than after-tax money. It’s putting money in your pocket.
To decide if an FSA is right for you, take stock of your health. If you have any ongoing or planned medical needs that you may need to pay for in the coming year, an FSA is a great use of your money. If you can’t think of ways to use the account, then you probably don’t need to.
How to use an FSA
FSAs can also be used for medical equipment and treatments such as:
- Medicines prescribed by a doctor.
- Blood sugar testing supplies.
- Birth control.
- Draws milk.
- Pregnancy tests.
- Psychological treatment.
- Smoking cessation programs.
You cannot use your FSA to pay for gym memberships, over-the-counter drugs, vitamins, or cosmetic procedures. In some cases, such as smoking cessation or dietary advice, you may need a doctor’s referral to prove that you really need the covered treatment. For a complete list of treatments and rules covered, see the IRS document on approved medical expenses.
Determine your annual contribution
If this is your first job, you will need to make some predictions. Carefully read your employer-sponsored health care plan to learn more about the cost of co-pay. If you have an underlying illness, such as asthma or diabetes, consider how much you will pay for your medications. Then consider your other needs as well. For example, you could use funds for dental or vision care (including co-payments).
FSAs are “Use or lose” which means that the amount in your account will expire at the end of the year. However, employers have two options to prevent employees from losing the remaining funds at the end of the year: carry over the funds or apply a grace period. The first option allows you to carry forward up to $ 500 to the following year. The second option offers a 2.5 month grace period to spend the remaining funds. Employers can offer either option, but not both.
The bottom line
There is no one-size-fits-all when it comes to flexible savings accounts. To decide if this one is right for you, forecast the upcoming health and related expenses for the year and familiarize yourself with the proposed FSA plan.
“You need to read your business plan to know what you’re getting into because it may be more restrictive than the IRS,” says Coleen Pantalone, personal finance expert and finance professor at Northeastern University D’Amore-McKim School of Business. In Boston. “Take the time to figure it out and ask for help if you need it. “
Anna Helhoski is a personal finance writer for NerdWallet. Follow her on Twitter @AnnaHelhoski.
This article was updated on May 20, 2016. It was originally published on May 27, 2015.