Flexible Spending Accounts (FSA's)

FSA‘s are special accounts used to pay health care expenses or dependent care expenses.  (There are different rules for health care accounts and dependent care accounts; in this section, we’ll focus on the health care accounts.) Money contributed to a healthcare FSA’s is used to pay for (qualified) out-of-pocket medical expenses. 

Why are they so special? As we mentioned before, you don’t have to pay any federal, state, or social security taxes on this money!  For example, if your marginal tax bracket is 10%, and you put $1000 per year into a medical FSA, you’ll save $100 in Federal taxes, $76 in SS taxes, $30 in PA state taxes.  Contributions to FSA’s are made with what is referred to as ‘pre-tax’ dollars.

The caution with FSA’s is that employees don’t ‘own’ the accounts, and they have a “use it or lose it” clause.  If you don’t use all of the money contributed to the account during the calendar year, you will forfeit that money.  That scares a lot of people away from using FSA’s, but there is a way to prepare and not be scared to use this great benefit.  The key is keeping good records and knowing your predictable medical expenses.  

So, how much should you put into your own FSA?  Click on Flexible Spending Accounts - Health Care to access the worksheet and follow along with the example below.

Step 1:  Let's say your health plan's annual deductible (A) is $500, which is what you have to pay out of pocket before the insurance will begin to pay.

Step 2:  Let's say you are single, with two children.  Added up the amounts for doctor’s visit (B) and prescription co-pays (C), dental care (D), eye care expenses (E), or other predictable out-of-pocket expenses (F) you pay for yourself and each of your children.

Family Member	Doctor Visit Co-pays	Prescription Co-pays	Dental Care	Eye Exams/ Glasses	Other
You	$100	$120	0	$300	0
Child #1	$100	0	$1,200	0	0
Child #2	$100	0	0	$300	0
Totals	(B)$300	(C)$120	(D)$1,200	(E)$600	(F)$0

Step 3: Anna adds amounts (A) thru (F).

(A)	Health care plan annual deductible:	$   500
(B)	Doctor visit co-payments:	$   300
(C)	Prescription co-payments	$   120
(D)	Dental care:	$1,200
(E)	Eye exams and glasses:	$   600
(F)	Other health care costs:	$       0
Total Estimate of Out-of-Pocket Expenses:		$2,720

Step 4: If you divide your total estimated amount by the number of paychecks received during the year (let's say you get paid every two weeks-26) to calculate the amount deducted from each pay that will be deposited into the FSA.

                     $2,720           ÷           26       =               $  104

      total estimate           # of paychecks         amount deducted
          of costs              received per year         from each pay

If your federal income (marginal) tax bracket is 10% and have a state/local income tax at a rate of 4.5%, combined, this is how much you may save by making the pre-tax contribution to your FSA.* 

Annual Contribution				$ 2,720
Federal  Tax Saved (10%)			$     272
State/Local Tax Saved (4.5%)			$     122
FICA Tax Saved (7.65%)			$     209
Total Taxes Saved				$    603
Net Contribution Affect				$ 2,117

In reality, your FSA contribution will only "feel like" $81 per pay.

If you are still worried about that use it or lose it clause, just a smaller amount per pay.  Even a small amount into an FSA can still save you money in taxes in the long run. 

Next up: Health Savings Accounts