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?
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Anonymous says
Can you use the pre-tax $ in your flex spending account to pay the employee share of a health insurance plan??? AJ
Harry Sit says
AJ,
No, money in health care flexible spending account cannot be used to pay health insurance premium. If your company sets up a section 125 cafeteria plan, the deduction for the health insurance premium should be already pre-tax.
sewall says
Two points. Most people are eligible for the child and dependent care tax credit, based on spending up to $3k of services. This is not as good a deal as the $5k you get in an FSA. It isn’t even likely to be as good as a $3k FSA because of the avoidance of Social Security and Medicare tax with an FSA. (Getting into this is a bit complicated.) But, if you only spend $3k and you forget to set up or don’t want to be bothered with an FSA (not that it is hard), you still get some benefit when you do your taxes.
Second point. There is a loophole with the child-care FSA (and maybe the health-care one too–I don’t know about that one). If you set it up and use the money and later find out you weren’t eligible, due to income limitations, then it just gets sorted out on your tax return. No penalty. But you still have gained! Your tax return only figures the income tax you should have paid, not the SS and Medicare tax. So, you still save on the SS and Medicare tax even if you weren’t eligible. Amazing! This is why I always set one up even if I am not sure of our eligibility. (We don’t know my wife’s self-employment income until the end of the year so I can’t know in advance if we qualify.)
supergreat says
Does anyone know the brackets and claim maximums for HCEs for dependent care account? I have no problem finding out what they WERE for last years filing, but there seems to be a dearth of info for this coming year’s filing