Episode #24 - FSA, what?
If you've got no idea what this means - or even a little idea - take a read.
Intro:
Deferring your taxes or paying them as soon as possible has been a theme throughout our journey together in the world of #Winnings. A calculation usually emerges, will taking the tax loss now end with me having more or less money in the future - and there you go, you make a decision.
What about things you need to spend money on now? Healthcare, for example. While health insurance covers many of your medical expenses, there are some costs that are not included in those calculations. What would the world look like if there was a way to put away some of your paycheck, before taxes, to pay for things you either expect or assume will be expenses for yourself or a family membrer over the next year?
INTRODUCING:
FLEXIBLE SPENDING ACCOUNTS
Thrilling as that was, please read on to take a closer look at what might be a mysterious arrangement of the letters F, S, and A.
Background:
Always good to start with the history - and narrow the focus of this note. I’m going to focus on FSAs as they relate to medical expenses, HealthCare Flexible Spending Accounts (HCFSA). There are other types of FSAs, but the time is short and the labor is great.
Section 134 of the Revenue Act of 1978 opened the doors for the world of tax-favorable treatment for medical expenses. Remember, not everything is covered by insurance - for example, getting a pair of glasses, or even the balance of the bill if you’re blessed with eye-care insurance.
If you have an HCFSA, you may request your employer to allocate a portion of your annual salary in a plan year to come out of your pay to be deducted each pay period. For example, if you want to put away $500 over the course of the year and you get paid two times a month, you’d notice about $21 taken off each paycheck. This money would come off before tax so if you were making $45,000/year this would reduce your taxable income to $44,500.
If you’re curious as to what items are covered by an FSA account, this list is a helpful place to look. Knowing what is eligible for these purchases is a great way to be sure that you utilize what you’ve got to spend.
Takeaway:
A few quick hits
How do you decide how much to put away?
It helps to look at your “prior experience” to estimate how much money you might need in this account. How many times did you go to the doctor and have a co-pay? What about your other family members? This is a good place to start. You can also see past claims on your insurance portal website.
Remember that 100% of the amount you allocate at hire or annual enrollment is available to you at the START of your benefits year. So, as in the example above, even if you’ve only put in $21 worth of your first paycheck into the account you can spend $500 and the plan will reimburse you immediately. This is most useful to recall when you leave your job because you want to use the TOTAL you allocated even though that has not come out of your pocket yet. This comes from your company and it is a perk you deserve to benefit from!
As opposed to HSAs (for a different letter), HCFSAs are use-it-or-lose-it plans! (Another reason why estimating your spend accurately is important.) So if you don’t spend all of the money at the end of your benefits year you forfeit that money. For example, you allocated $1000 and you only had $250 of eligible expenses, you could lose $750. With the Affordable Care Act there are two options for plan extensions employers may offer, one or the other, that could mitigate a loss: (1) Carryover of up to $550 (as of 2021) into the next plan year, so you’d only lose $245 in the case above, or (2) a Grace Period which would allow you to apply expenses incurred in the first 2.5 months of the next plan year to a prior year’s allocation.
Interact:
Do you have an FSA with your insurance benefits package? Do you know how much, if any, you put into it?
Let the community know what you find out when you ask the benefits pro at your company.
Who taught me this idea?
Conveniently, as the son of two people who work in the world of benefits, my mother, Gail Weinberg, and my father, Stewart Weinberg, gave me a lot of this knowledge through good old table talk. Recognizing the power of a company’s benefit offerings, makes a huge difference in the way you go about getting a job.
