A flexible spending account (FSA) is an employer-offered benefit that allows employees to make a regular pre-tax deduction from their paycheck that is set aside for medical expenses. Employees set their own deduction amount based on how much money they spend send per year on health needs that are not covered by their health insurance. FSAs are not intended to replace insurance plans; instead they are a supplement that allows employees to prepay some or all of their annual medical expenses.
Tax Savings
The biggest benefit of a flexible spending account is that the money is deducted from the employee’s gross income, which means that he or she doesn’t have to pay taxes for that amount of income. The deduction also reduces an employee’s taxable income for the year. For example, someone in the 25 percent tax bracket that contributes $1,500 a year to his or her FSA will save $375 in taxes. That same amount is also deducted from the employee’s taxable income for the year, so he or she may also even qualify for a lower tax bracket.
More Coverage
FSAs provide a broader range of coverage than health insurance companies. Some examples of things that flexible spending accounts cover are: co-pays, prescription drug costs, and birth control. Coverage varies depending on the employer’s plan, but some plans also cover things like smoking cessation and alcohol or drug rehabilitation. Some even cover the costs of diabetic supplies, analgesics, contact lense solutions, and other common over the counter medications. Many FSAs cover almost every medical expense except for elective plastic surgery. FSAs can provide better coverage than health insurance because the out of pocket cost is paid by the employee and not the company that manages the flexible spending account.
Debit Cards
An increasing number of healthcare flexible spending accounts are now offering debit cards to account holders. The FSA debit card is like a regular Visa or MasterCard debit card except that it can only be used in certain places like a doctor’s office or a drug store. FSA debit cards allow employees to access their FSA funds directly without spending money in addition to what they’ve already contributed to the FSA and then waiting for reimbursement.
Deductible Relief
Because insurance costs rise every year, many small to medium businesses shop around insurance policies regularly. If your employer changes coverage, you may end up with a plan that has higher deductibles. Enrolling in a healthcare flexible spending account means that you have money put aside to cover those increased deductibles when you need to.
Overall flexible spending accounts are a wonderful healthcare benefit, but they do require some budgeting. The one biggest downside of FSAs is that you have to use all the money you contribute within three months of the following calendar year, or you forfeit that money. However, even a modest FSA contribution will still save you tax money. If you set a slightly conservative amount in your flexible spending account, you can enjoy all the benefits without worrying about losing money.
About the Author: Tony Smith is a full-time writer with a focus on personal finance, insurance, and spending. He is also a regular contributor at CreditLoan.com.