I want to thank Amy in Connecticut for suggesting this topic. Remember it’s not too late to enter the contest to win a Kill-a-Watt energy monitor.
FSAs or Flexible Spending Accounts are one of those benefits that I find a lot of my clients overlook. I want to shed some light on this benefit so more of you will participate in your plans. Not all companies offer FSAs but if your company does, you really need to consider signing up.
There are two popular types of FSAs: Medical and Dependent Care. Medical FSAs are used to pay for, you guessed it, medical expenses. Dependent Care FSAs are used for day care expenses.
Here’s how it works: You decide how much money you want to go into your FSA over the course of the year. You fill out a form and your employer deducts the money from your paycheck each week. The money is deducted before employment and income taxes. Therefore, you will not pay social security, medicare, federal or state income tax on the money put into the account. If you live in Connecticut and are in the 25% tax bracket, you could save 37.65% in taxes on the money put into your account (7.65% social security and medicare tax, 25% federal income tax and 5% state income tax). Not a bad deal, right? When you spend money on “qualified expenses”, you submit receipts to the plan and get a check in the mail. Some plans have debit cards they will load the money on for you. When you make the election to have money withdrawn from your paycheck, the entire amount you indicated for the year is available on day 1. Therefore, if you need your wisedom teeth out on January 2, all your FSA money is available. If your daycare bills are more than you’ve put into the plan so far, that’s okay too.
With these plans, the employer sets the limit for how much you can put in each year. Most of the plans I have seen allow employees to put in up to $5,000 per year. Here is the catch: the money is “use it or lose it”. If you do not use the money by the end of the plan year, kiss it goodbye. There is an exception, though. Most plans will allow a 2 1/2 month grace period to use up your money. Check with your specific plan to make sure this exception is in place. For dependent care FSAs, I have never seen a client who put in the full $5,000 not get all their money back. Child care is expensive.
For a medical FSA, you would be amazed what qualifies for reimbursement. Not only can you be reimbursed for co-pays and prescriptions, but the plans also cover over-the-counter medications, dental and vision care (including glasses) and medical supplies. A plan I was enrolled in even covered condoms and pregnancy tests. You’ll have to check your individual plan to see what it covers.
The first thing you’ll need to do is get the information from your employer. Then sit down and estimate your annual medical spending. Don’t forget eye exams, glasses (if needed), dental visits, prescription copays and at least one copay for a doctor’s visit. If you have children, don’t forget about their medical expenses as well.
You can save hundreds of dollars in taxes each year by putting money in a FSA. This is much better than trying to take the medical deduction on your tax return. First, when deducting medical expenses on your tax return, you must be able to itemize. Second, your medical expenses must exceed 7.5% of your adjusted gross income. The amount that exceeds the 7.5% is the amount you get to deduct; you lose the first 7.5%. Plus, when deducting medical expenses on your tax return, they are still subject to social security and medicare tax.
These plans are a great way to put more money in your pocket. Go see your HR representative today to see if your company offers FSAs!