Listen to Your Heart...Maybe You'll Use an FSA
A little record keeping can mean substantial savings
Not all decisions need send you running for the nearest copy of Navigating Your Health Benefits for Dummies (yes, there is one). The flexible spending account is simple: If your employer offers oneand most large firms doyou should seriously consider using it. An FSA lets you put away pretax dollars to pay out-of-pocket medical expenses ranging from surgery to over-the-counter sinus spray. The money is pulled from your paycheck into an account from which you are reimbursed.
If you manage your FSA wisely, it can mean substantial tax savings: 23 percent, on average. The breaks are even bigger for earners in the higher brackets. Someone in the 28 percent tax bracket who puts aside the maximum of $5,000 each year, for instance, can save an estimated $1,400 in taxes.
The only tricky part is determining how much to put into the account, since with most plans what you don't use by the end of the year you lose. Witness the December bottleneck at eye doctors' and dentists' offices as patients scramble to spend down their FSAs. "The most important part of an FSA is to keep good records and plan carefully for the year ahead," says Kevin Kraushaar, vice president of government relations for the Consumer Healthcare Products Association. "Otherwise you may end up leaving money on the table."
Turnoffs. That fear, plus a lack of understanding of the tax benefits, and the hassle of keeping records and filing for reimbursement, may explain why only 20 percent of employees at big companies offering FSAs actually participated in the program last year, says Blaine Bos, a worldwide partner with Mercer Health & Benefits, which conducted an industrywide study in 2006. "Many people don't understand the tax advantages of an FSA, or they are worried about losing money at the end of the year." For fear of not recouping the money set aside, FSA participants often put less into their accounts than they should.
But their worries may be overblown. Estimating future expenses isn't as daunting as it seems, and playing it safe by underfunding an FSA will still create benefits at tax time. To start, tally up your biggest and most obvious expenses: deductibles, estimated copays for office visits and prescription drugs, eyeglasses, routine out-of-plan doctor and dental visits, or those that are only partially covered, such as psychotherapy. (Cosmetic surgery is not reimbursable.)
Then, if you are planning an uncovered procedure such as laser eye surgery, or major dental work, you can set aside funds for that. Estimating expenses for over-the-counter drug purchases, which have been reimbursable with FSA funds since 2003, can get dicier, especially the first year when you may not have receipts to gauge your previous-year expenses. As a general rule, over-the-counter products used to treat personal injuries or sickness are eligible. They include antacids, allergy medicines, pain relievers, and cold medicines. Some dietary supplements may qualify so long as they are needed for a specific medical condition, such as calcium for osteoporosis or iron for anemia.