Save Money With Flexible Spending Accounts

MASH unit pharmacy in Haiti

If you work for a fairly large company, chances are that you have access to some kind of an employer cafeteria plan.  I’m surprised how many of my co-workers do not utilize them and how many of them would definitely save some money from using them.  Below I write about the two common ones I elect in, the health-care flexible spending account (FSA) and dependent-care flexible spending account (FSA).

Briefly, an employer cafeteria plan (also known as Section 125 plan named after the IRS code) are special plans offered by your employer that helps you and your employer save on taxes.  One of the most common employer cafeteria plan is the flexible spending account (FSA) which you can usually elect during annual open enrollment.  FSA’s allows you set aside pre-tax money in an account that you can then use to reimburse specific expenses.  Contributions to an FSA are taken out of your paycheck and escape federal and state income taxes, as well as Social Security and Medicare taxes.  The higher your income tax bracket, the more you save.  Awesome.

Health-Care FSA: Depending on your company, you can set aside as little as ~$250/year to a maximum of $2550/year (IRS limit for 2015) pre-tax.  You can then use this money to pay for health-care related expenses such as prescription copays, office visit copays, dental work (non-cosmetic), contact lens and solution, glasses, over the counter medications with a prescription and more.  Even a healthy, young person with no dependents, might spend at least $250/year on something health-care related.  Take a look at the list of covered expenses on your HR website.  If you’re older with a family, you should definitely be electing this.

Dependent-Care FSA: Again depending on your company you can set aside as little as ~$250/year to a maximum of $5000/year (IRS limit for 2015).  You can then use this money to pay for dependent-care related expenses like daycare, preschool, after-school care or even caring for a dependent adult such as a sick spouse or a sick parent who’s dependent on you while you work.  Only dependent-care expenses incurred while you and your spouse both work are eligible for reimbursement (or if your spouse is disabled or a full-time student).  So if your husband is a stay at home dad (SAHD) or visa versa you don’t qualify for this benefit.  If you work part-time (like me), the amount eligible for reimbursement is prorated, but with the cost of daycare/preschool now a days, I know we exceed $5000/year by a large margin.  Unfortunately, you can’t use this account to pay for your “under the table” nanny.

A quick word about dependent care tax credit vs. dependent-care FSA.  So when we only had one child, we had to chose between the child care tax credit ($3000 in our case) or funding a dependent-care FSA.  The government said no double dipping, so you can’t get both, even though our preschool costs us >$10,000/year (on an aside, several people I know pay close to $20,000/year for their kids daycare/preschool.  Ugh).  Anyways, the more expensive your dependent-care expenses and higher your income bracket, you should definitely be electing this benefit if it’s available to you.  Also, once you have two kids or more (yay!) you can claim both, if your childcare expenses exceed $5000, then you can fund a dependent-care FSA and claim the child-care tax credit for $1000.  Seriously though, does anyone out there pay less than $5000/year for full-time childcare anymore??

There are two cons to these plans:

Use it or lose it.  This means if you don’t use the money in your account by December 31st of the calendar year you elected it, you will lose it.  It’s gone!  Some employers will offer a grace period of 2.5 months (IRS decision) to use up your remaining funds, but sadly my employer does not.

Having to save the receipts and submit them.  If you are not organized, you will not like having an FSA.  Having an FSA requires you to save receipts and then later scan and submit them to the FSA provider.  It’s a bit of a pain especially when you have to make your husband track down all his receipts, but I still think the savings are worth it.  Most employers give 3 months grace period after the close of the FSA calendar year to submit your receipts.  So if the last day to incur FSA expenses is 12/31/2015, you would have until 3/31/2016 to submit the receipts.

To give you an idea of the savings, we typically elect $1000 for our health-care FSA and $5000 for our dependent-care FSA.  The FSAs provide about a 40% savings so, that’s a savings of $2400/year on expenses we already have to pay for.

So in summary, almost everyone can benefit from electing a health-care FSA and a dependent-care FSA can help take out a little of the sting of paying for exorbitant child-care.  What do you think?  Do you contribute to an FSA at work?  If you don’t, will you now?

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