This is the fourth installment of the Open Enrollment mini series. Previous posts in the series were
- Open Enrollment, Part 1: Health Care
- Open Enrollment, Part 2: Life Insurance and AD&D
- Open Enrollment, Part 3: Disability Insurance
I cover flexible spending accounts in this post.
A Flexible Spending Account (FSA) allows you to set aside money before tax and pay for health care and dependent/child care using pre-tax dollars.
It’s a great deal because you get to use pre-tax dollars. Not only you don’t have to pay federal and state income tax on your deposits to the flexible spending accounts, you also get to skip Social Security and Medicare tax.
The only catch is “use it or lose it” — you lose what you can’t use. [Update in July 2015: The rule is relaxed now. Some employers let you carry over up to $500. Some employers give you another 2-1/2 months in the following year to use it up.] Because there are many ways to spend the flexible spending account money, and because the tax savings is substantial, you have to be way off in your estimate to lose money in an FSA.
There are two kinds of FSAs, health care and dependent care. Each has its own separate “bucket.” Deposits into one type can be used only for that purpose. You can’t use Health Care FSA to pay for child care and you can’t use Dependent Care FSA to pay for health care. You can’t transfer funds from one bucket to the other either.
Health Care Flexible Spending Account
Health Care FSA can be used to pay for health insurance deductibles, co-pays, medication or services not covered by the health plan, and even contact lens solutions and condoms. Just make a ballpark estimate of how much you will spend on those things. Be a little conservative if you want (who plans to be sick anyway?). I’ve been using around $1,000 for the two of us and we never lost any money.
Dependent Care Flexible Spending Account
This is typically used for day care expenses for your child. People usually have a very good handle on the need because they know how much day care costs. The maximum a family can contribute is $5,000 a year and people tell me that they use up that limit pretty easily.
This concludes the Open Enrollment series. I hope you find these useful. Any comments?