Your employer may offer a flexible spending plan that allows you to put dollars in an account without the payroll taxes being deducted first. You are then reimbursed for your out-of-pocket medical expenses, such as copays, prescription drugs, dental care, etc. Because these contributions are taken out of your pay before federal and state taxes are calculated, you get to use pretax dollars to pay your medical bills. That saves you between 10-35% of your bill, depending on your federal tax bracket. It also spreads the cost out over the year, saving you painful lump sum withdrawals.
What is a Flexible Spending Account (FSA) ?
A flexible spending arrangement (FSA), is a tax-advantaged financial account that is set up via a cafeteria plan of an employer. An FSA allows the employee to set aside a portion of their earnings to pay for qualified expenses, most commonly for medical expenses but also for dependent care and other qualifying expenses. Funds deducted from the employee's pay into an FSA is not subjected to payroll taxes, which results in a substantial payroll tax savings.
What kind of expenses are eligible under an FSA plan?
The details will vary, but a good example listing of eligible expenses follows:
• Hospital services
What kind of items are typically not eligible?
|• Advance payment for future medical care
• Amounts reimbursed from any other source (health coverage or another FSA)
• Cosmetic surgery (unless necessary due to disfi guring trauma or disease)
• Diaper service
• Electrolysis or hair removal
• Health insurance premiums (e.g., COBRA, AD&D, LTD, STD, long-term care,
group and individual health insurance and Medicare premiums)
• Health club dues
Are there any disadvantages to an HSA?
By law, employees forfeit any unspent funds in their account at the end of each year. While there have been some proposals introduced in Congress to ease the "use it or lose it" rule, perhaps allowing up to $500 to be carried over to the next year... these proposals have not yet been enacted.
This means that you need to plan well, and not put money in the account that you won't likely use. Because of the wide variety of eligible expenses, however, a family should have no problem using $1000-$3000 ( a typical contribution amount ). Also consider the deductible amounts on your health insurance. If you have a high deductible plan, you should consider that the HSA can cover your pre-deductible eligible expenses.