Do you hate more money?
If you have access to a flexible spending account at work and don't use it, perhaps you're a more-money hater.
FSAs allow individuals and families to save hundreds of dollars per year by reaping 25 percent to 40 percent discounts on insurance deductibles, co-pays at the doctor, prescription drugs, eyeglasses, dental braces and even Band-aids and contact lens solution at the drug store. There are 38,000 products and services you can pay for with tax-free FSA money.
This fall, during employers' so-called open-enrollment periods, you should give serious consideration to signing up for an FSA.
That is, unless you hate more money.
The biggest problem with FSAs is they mix the deadly dull topics of insurance and taxes, and employees don't want to deal with it — even if they could save enough money every year to buy a new iPhone or roundtrip airfare to the Caribbean.
"It's like giving yourself a raise," said Jody Dietel, spokesperson for Save Smart Spend Healthy and chief compliance officer at FSA administrator WageWorks Inc. "People leave money on the table if they're not willing to put the time into it."
To help, here are questions and answers about FSAs.
What is an FSA? It's an account that you fund from your paycheck. You use the money to pay for you and your family's out-of-pocket medical expenses, such as doctor co-pays, medical supplies and dental and visions expenses. The key is that money going into the account isn't taxed. So, when you spend it, you're spending tax-free money, essentially getting a discount on everything from root canals to contact lenses.
How much can I save? If you normally spend $1,500 per year on out of pocket on medical, dental and vision products and services — that's about the average an FSA participant pledges to the account — an FSA allows you instead to spend about $1,050, assuming your tax rate is about 30 percent. That's a savings of $450 that would have gone to taxes and instead is paying your bills. Experts say savings range from 25 percent to 40 percent, with those in a higher tax bracket saving more. The money is sheltered from federal, state and Social Security taxes.
How does it work? You designate a yearly amount to contribute to the FSA. Your employer deducts a prorated amount before taxes from paychecks all year long and deposits the money into the FSA. Whenever you pay for an approved medical item, you draw down on the money in that account. You must sign up again for an FSA each year.
If FSAs are great why do so few employees use them? FSAs, which have been around since 1978, have one big, hairy drawback, the draconian "use it or lose it" rule. If by the end of the plan year you don't use all the money in the FSA account, you lose it. Actually, your employer keeps it.
"That's the No. 1 reason people are nervous about participating in a healthcare flexible spending account," said Karen Frost, vice president of product strategy and development at Aon Hewitt, an FSA administrator.
But "use it or lose it" is not as scary as it sounds if you spend even minimal effort setting up and using your FSA. Most plans allow you until March 15 of the following year to use up the money, essentially giving you 14.5 months to deplete your account.
How much should I contribute? The main fear with "use it or lose it" is pledging more money to the account than you'll use. To gauge your contribution, base your FSA contribution on your out-of-pocket expenses from the previous year.
"Your healthcare expenses are more predictable than you think," Frost said.
You can go through your records from the previous year, whether from charge account statements, a checkbook or money-management software, if you use it. Some health plans give you online access to your previous year's expenses, including your out-of-pocket costs, and offer online calculators to help you decide how much to contribute.
"With a little planning, FSAs are a huge tool to stretch those paycheck dollars," Dietel said. Keep in mind that even if you forfeit some money at the end of the year, you can still come out ahead because you've saved so much by avoiding taxes.
If you're still wary, one strategy would be to pledge just $500 to an FSA account to try it for 2013. Even healthy, single people should easily be able to use $500, experts say.
Is an FSA difficult to use? Not anymore. You used to have to keep track of receipts and fill out reimbursement paperwork. Now, most plans issue you an FSA debit card with a charge card logo, such as Visa or MasterCard. So you can use it where credit cards are accepted, including many doctor's offices. "The pain and agony of saving your receipts and pill bottles in a shoe box is gone," Dietel said.
