Flexible Spending Accounts in the Workplace
Many people in America know the truth about today’s healthcare, it is expensive. They see it in their private health insurance policies and in their company’s cost-shared plans. Premiums are increasing every year and companies are shouldering less of the financial burden. The reason behind this truth rests back on the patients denied adequate care, the families deprived of loved ones and the doctors decreasing chances for affordable mal-practice insurance. More important than why is what you can do to protect you and your family’s medical and financial interests.
Flexible Spending Accounts (or FSA Accounts) are just one of the increasing numbers of ways that you can protect yourself against an unexpected financial crisis due to ailing health. These accounts are increasing in popularity and regularity in the common workplace because of their ease of use and relatively low cost for your employer. Here is how they work:
Each FSA account (varies by employer) is set up on its own “plan year”; each plan year begins with an “open enrollment” period and runs twelve months. It is common for an employer to make their plan year coincide with a “calendar year” – the standard January through December year. During the open enrollment phase, an employee sets a yearly amount for their FSA account and agrees to the terms of repaying the account in pre-tax “employee contributions” throughout the plan year.
It is important to note that the FSA account is under IRS Code Section 125, same as any other pre-tax health plan, meaning that once an employee elects an amount for their FSA account they cannot make any changes until the following open enrollment period. From day one of the plan year, an employee is allowed to make a claim against any amount, up to their FSA limit, without regard to the amount contributed back to the plan.
In summary, an FSA account can be likened to a type of loan you are taking out from your company for a period of only one year. There is no interest rate on the loan and the repayment plan uses pre-tax dollars, thus, you are lowering your taxable wages and directly your taxes paid. The money from the loan has to be used to pay for medical purposes only for you and/or your tax dependents that occur during the plan year (check with your employer to see if they elected the “grace period” thus increasing your claim time by anywhere from one day to three and half months past the end of the plan year).
When is an FSA account right for you? If you take a “maintenance drug” (prescription drug needing to be taken regularly), if you visit the doctor/hospital at least once a year, if you need dental/vision work done at least once a year. If you have any foreseeable medical expenses on the horizon than this plan could be used to pay for these expenses over the period of a year with pre-tax dollars (equals less tax).
When is an FSA account not right for you? If you are in relatively good health with no chance of needing any medical attention or if you plan on leaving your place of employment before you would be able to use your FSA account (these accounts are not portable).
If you already have an FSA account and would like to learn how to maximize your savings, here are some tips to consider:
• Prior to enrolling in the FSA plan, prepare a worksheet with your estimated yearly medical expenses. If this is your first year, consider electing only 60% of your total expenses to prevent unused dollars. If you are re-enrolling, you should feel comfortable with how your company’s plan is administered and elect your amount accordingly. (Note: If your company is using an FSA administrator that allows for your FSA account to be accessed through a debit card, make sure you take this into account when electing your amount. The convenience of the debit card makes medical purchases easier and thus depletion of the funds quicker.)
• If your company’s FSA plan utilizes debit card technology, do not be lulled into thinking that you no longer have to submit any claims. The best tool in the FSA account arsenal is the envelope. Use one to store all of your receipts for your plan year; even receipts for purchases made on your debit card. Technology is being made available for FSA administrators to “auto-adjudicate” your purchases at the point-of-sale; for everything else you may be asked to produce a legitimate receipt for manual adjudication. Purchases not validated with a receipt can be marked as invalid and you can be required to reimburse the plan accordingly.
• Ask your company’s benefit administrator for the customer service number of your FSA plan administrator and call them often to find out what is considered a valid medical purchase. The number of items considered eligible is too lengthy to be published by your employer; however, plan administrators keep these long lists handy for claims adjudication purposes.
• If you find yourself heading towards the end of your plan year and you have not used all of your available funds consider buying a first aid kit for the car, a discount on a new pair of prescription glasses, or even a lifetime supply of band aids.
• Check with your employer to find out if they offer a grace period on the FSA plan. The grace period can be used to reimburse expenses incurred in a new plan year against an old plan year’s remaining balance. If your company does support a grace period and you are planning on using this grace period and re-enrolling in a new plan year be careful not to double-up on your election!
Finally, what your employer may not want you to know is that every FSA plan is a “use-it-or-lose-it” plan. Any funds you have not used at the end of the plan year (or grace period) are not refunded back to you but are recycled back into the plan as “plan assets”; conversely, any funds you may have spent against your FSA account but not reimbursed through employee contributions at the time of your departure from the company cannot be recouped from you. Plan wisely, spend accordingly.