Do you have health-care or dependent-care (daycare) costs that you pay for out of pocket? Does your employer offer a Flexible Spending Account (FSA)? If you answered YES to both of these questions then you could be saving money by utilizing your employer sponsored Flexible Spending Account.
The advantage to a Flexible Spending Account is the money you put into the account is not taxed. To illustrate the advantage, let’s say in a year’s time you pay for $5,000 in daycare and $2,000 in family medical costs. For this example, assume you pay an income tax rate of 20 percent. If you paid for these expenses with income you earned from your employer, on which you paid income tax, you would have needed to earn $8,750 in income which is then taxed at 20 percent ($1,750) to give you a total of $7,000 aftertax. You then used that $7,000 to pay for the daycare and healthcare costs. However, if you used a Flexible Spending Account that $7,000 would have been taken out of your pay over the course of the year and you would never pay taxes on it, therefore saving you $1,750 in income tax. Who wouldn’t like to keep $1,750?
How do I start putting money into an FSA?
Each year, typically during open enrollment for your employer’s benefits, you will need to predict how much you are going to incur in health care and dependent care (daycare) costs. That amount will then be subtracted from your pay over the course of the year (on a before tax basis) and placed into the FSA. Let’s say you are paid weekly and you want to put $7,000 into the FSA. Each week approximately $135 will be deducted from your pay (before tax) and placed into the FSA. Remember this is before-tax money, so the “hit” on your take-home pay, which is after tax, will be about $101.
CAUTION: Do not overestimate your annual health-care and dependent-care costs. The funds you save in a FSA are “use it or lose it” and if you have a balance left in the account at the end of the plan year it will be forfeited. You can only contribute up to $5,000 a year for dependent-care costs. You will want to check with your employer to see if there is a cap for the amount you can contribute for health care costs.
How do I get the money out of my FSA to pay for Health Care and Dependent Care Expenses?
Most programs today will come with a debit card that deducts the expenses directly from your FSA. In some cases you may need to substantiate the claim by providing an itemized invoice and/or receipt. If you paid for an expense out-of-pocket then you can request reimbursement by providing the requested documentation.
TIP: With a health care FSA, you can receive reimbursement for expenses before sufficient funds are withheld from your pay, as long as your total expenses submitted don't exceed the contribution amount you elected for the plan year. For example: At the beginning of the year you elected to have $2,600 contributed to the FSA. However, you are one month into the plan year and have only had $200 deducted from your pay and put into the FSA. During that one month you incur a $1,000 medical expense. Even though you only have $200 saved in your FSA, you can use your FSA debit card to pay for the $1,000 expense OR request for reimbursement if you paid for it out-of-pocket.
What are some common health-care and dependent care costs that can be paid through a FSA?*
Eligible Health-Care Costs: Ineligible Health-Care Costs:
Co-Pays & Deductibles Cosmetic Dental (ex. Veneers / Whitening)
Dental Treatment Cosmetic Surgery
Prescription Drugs Over-the-Counter Drugs with no Prescription
Contact Lenses & Eye Glasses
Over-the-Counter Drugs if Prescribed
Eligible Dependent-Care Costs: Ineligible Dependent-Care Costs:
Before or After School Programs Educational/tuition expenses
Daycare Centers Payments for care while you are off work
Summer Day Camps Food, clothing, or education expenses
Preschool/Nursery school for pre-kindergarten Payments to unlicensed Daycare Providers
Custodial eldercare expenses
*Readers are cautioned to review their own employer-sponsored benefit plan descriptions and enrollment material for specific information or to consult with their employer or personal tax advisor as necessary.
Written by: Melissa Stewart is a Certified Financial Planner practitioner and Financial Advisor with the VanderWeele Stewart Group of Raymond James. She speaks at local events and is passionate about financial education in the community. Visit www.vswealth.com to learn more. Photo: stock.xchng
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNERTM and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
Raymond James & Associates, Inc., member New York Stock Exchange/SIPC and not affiliated with the West Michigan Woman magazine. As federal and state tax rules are subject to frequent changes, you should consult with a qualified tax advisor prior to making any investment decision.
