Flexible Spending Accounts (FSAs)

[azanon]

I'm a federal employee, and FSAs are another benefit that is avaliable to me, but I haven't taken advantage of yet. Here's the thing; Every financial advise I read says these are great if you have them and once should use them because it allows for you to use tax-exempt money for medical expenses.

But the thing that stops me is, that my understanding is, if you have money left over at the end of the year in a FSA, supposedly that money is forfeited (completely lost). So, if you overguess on how much you need (I would think an extremely likely scenario), then you could stand to lose a lot of money for nothing, nada, 0.

So i ask, why in the world would a young couple like me decide to put 2-3K in one of these and stand to lose every dime of that if we're both healthy?

Maybe i'm just missing something here, but it seens like participating in one of these is far riskier than just saying "i'm not interested".

Azanon

 

[Jay_Gatsby]

I typically put in $500 to $750 to cover co-pays, over-the-counter medications, contact lenses, glasses, and other expenses that can really add up over the year. The amount you're contemplating, namely, $2,000 to $3,000, seems a bit excessive for just two people. However, if you benefits aren't so hot (I don't know what the Government offers these days), then putting $1,000 to $1,500 isn't a bad idea if you expect to undergo significant medical procedures (e.g., LASIK eye surgery, wisdom teeth removal, etc...) You shouldn't have any trouble anticipating such procedures needing to be done, and can therefore plan accordingly.

 

[saluki9]

I put about $3K per year into our, but we have some pretty serious drug and doctor co-pays so we use more than that.

Don't forget, they have expanded the list of qualified expenses, so you can always stock up on OTC medications at the end of the year. Of course you may not want $2K worth sudafed (and the DEA investigation to go with it)

 

[Robert the Red]

Using an FSA requires planning forward to ensure you don't lose the money.  Which means you have to look backwards to figure out what you spent last year so you can estimate (conservatively) for this year.  As a Fed, your dental benefits probably suck, so you can figure those costs in.  Need glasses?  You've probably got no significant vision benefit (my FEHB plan pays $10 towards lenses, which isn't much compared to the $500 progressive lenses I'm using).  And so on.  But if you can't muster the energy to look back and plan forward, then (a) an FSA isn't for you, and (b) you probably won't make FIRE either.

 

[azanon]

But if you can't muster the energy to look back and plan forward, then (a) an FSA isn't for you, and (b) you probably won't make FIRE either.

Ouch, lol. 

Robert, the thing i ask myself is if its worth the time.  I have $350/year contacts, my wife $200/year contacts, dental for both of us is maybe $300/year and we have several $20 dollar copays for my one child, but is even ~$1200 dollars worth of FSA covered expenses worth my time?  .... Time to not only fill out the paper work, come up with a source of funding the FSA, AND having one more thing to deal with on my 1040.

How long would all of that take me Robert; all of the management required/all of the research?  I'm worth $30 an hour.   When i get done, and subtracting out what my time is worth (we all value our time highly here), am I going to save a grand total of $10 dollars?  Because i dont much care about saving $10 dollar, you honestly think that means I wont FIRE?   You have a great sense of humor, i think, Robert.

This is all to say nothing of the risk (and associated worry) of overfunding my FSA.

Azanon

* Another note: if i put $1000 into an FSA instead of my Utility fund which is making a killing this past year, how much will I lose due to that decision? Do the math for me; i made ~ 22% in my utility fund last year, Robert.

 

[obryanjf]

I put 1250 last year and actually spent about 1750 last year. This year the same put away and we will easily meet it due to new baby (12/29/05, NOW THAT IS GOOD PLANNING ) and minor complications ( .
Another advantage is if you have large expenses early in the year, then they can be paid for via the FSA and the contributions from your pay are evenly spread over the year. LIke an interest free loan. The related sibling of this, the Depenedant Care SA does not work like that.

job

 

[azanon]

Another advantage is if you have large expenses early in the year, then they can be paid for via the FSA and the contributions from your pay are evenly spread over the year. LIke an interest free loan.

Ok, now that i didnt know, and this would rebut my pointing out that i lose whatever I put into an FSA that could be invested. Still, seems like a lot of stuff to keep up with (setting it up, drawing from it, accounting for it on 1040), to save, what, about $200 bucks (per 1K, if your marginal rate is 20%)

 

[justin]

Azanon,

You are right that you don't benefit much from it. Let's say you put $1000 in it, and your marginal rate is 30%, like mine (15% fed, 7% state, 7.65% SS+medicare). Then you'll save $300 a year. Can you get everything done for the account in less than 10 hours - I hope so. I do this where I work. It is done through payroll deduction. I fill out a 1 page form, tape all my receipts to pieces of paper, and fax them to the administrator company. A week later, they mail me a check. We contributed $4850 this year. I'm getting LASIK at 30% off, a baby delivered at 30% off, and all the dental, OTC medicine and post-natal care I want at 30% off (up to $4800). It will also have the combined effect of making my Trad. IRA contributions completely deductible (MAGI of <$70k). I'll save $1500 + in taxes. In my case it is worth it. But it does suck that you lose it if you don't use it. I estimate expenses very low, so I don't put too much in.

And admittedly, I may not use it in the future, since our usual medical/dental expense is less than $1000/yr, and the headaches and time required to comply are significant (my time is valuable!).

I think I spent ~1-2 hours last year on collecting receipts, filling out paperwork and preparing receipts. I guess I saved $120 in taxes on $400 of FSA contributions. Not too bad hourly, but a hassle to keep up with receipts, plus the risk of losing some contributions.

 

[SteveR]

Justin, good post!

I have been using FSA for health (and daycare many years ago) ever since they have been available. I never back calculated the savings but with some significant recurring heath issues I have never lost a dime in these account over the years. I usually go with $3000-4000 a year. My Money program keeps all the medical bills for me and since I charge all of them it is a simple download from the CC site to Money and Poof! I have all my data in one spot. The receipts go in a file marked for FSA and I file twice a year to get "my" money back.

The tax savings are not huge but at 39% marginal rate I will take every penny I can get. I see it as a tax savings stategy to keep my Fed. taxes a bit lower. If I made money in and index fund I would have to pay taxes on that gain at my marginal rate so my return would need to be pretty high to make it worthwhile.

OTOH, if I were a young person with no kids and in good health....why bother?

 

[azanon]

Yeah, Justin, that's kinda how i concluded, ended up not using it, and just wanted to check with you guys to make sure i'm not insane for not having done so.   I'd only stand to use 1-1.2K/year, and that's an actual estimate of medical expenses, meaning to play it safe, my FSA account would/should be much lower to eliminate the risk of overcontributing.

In my case, it just seems like a lot of effort for only a bit of gain.    

That's not even in the same stratisphere as the potential gain I get via maximum contributions to my and my spouses's Roth IRAs every year; which could end up benefiting me 100s of thousands of dollars.

 

[justin]

In my case, it just seems like a lot of effort for only a bit of gain.

That's not even in the same stratisphere as the potential gain I get via maximum contributions to my and my spouses's Roth IRAs every year; which could end up benefiting me 100s of thousands of dollars.

The FSA won't cost you anything beyond what you are already paying - besides your time. If you put $800 in the FSA (a conservative amount), and spent it all, you would have spent it anyway. I'm not clear from what you've said about how it affects your IRA contributions, since you can do both and benefit from both. Of course, the savings on $800 contribution may not be worth it.

I guess if you have a major expense that you know about ahead of time (pregnancy/delivery, major surgery, LASIK, root canal/crowns, braces, etc.) you can plan ahead to a certain degree and use the FSA. If you can time it just right.

 

[maddythebeagle]

In my case, it just seems like a lot of effort for only a bit of gain.

since you dont have a problem with posting on this board at work, why do you have a problem with filling out the paperwork for this at work?

 

[cute fuzzy bunny]

We've had one the last two years and its been a royal pain in the ass. We're not going to do it again next year. If we were in a higher tax bracket, I might reconsider that.

Given we had a baby this year, it made some sense. We maxed the thing out. Last year was pretty easy, once a quarter I faxed a stack of receipts in with a form and we got a check back. Saved us a few hundred bucks. This year when I sent in the fax we got a letter back saying that the expenses werent qualified because my wife was on disability and not working (technically true...most women having babies probably arent working at the time). Turns out that it was just some silly paperwork problem and the check got punched after a few weeks of phone calls and a little hand wringing over the thought we'd see about $3000 "expire". Then we asked them to stop taking money out and they said that wasnt possible until the next subscription period. Of course they immediately stopped taking the money out after saying they couldnt. And for the last 3 months the balance in the account hasnt dropped to reflect the check already written. So something is still screwed up.

So I suppose if we had high recurring and/or expected medical bills and we were in a high tax bracket, I'd still do it.

 

[maddythebeagle]

This year when I sent in the fax we got a letter back saying that the expenses werent qualified because my wife was on disability and not working (technically true...most women having babies probably arent working at the time).

My experience with our plan is that they started denying claims excessively last year. I complained to our benefits coordinator and it got approved. I suppose that slow payment helps them keep the money longer.

 

[azanon]

since you dont have a problem with posting on this board at work, why do you have a problem with filling out the paperwork for this at work? 

Good question.  Easy answer though.   I enjoy posting here.

Any other questions?

Now you see just how lazy I am.  Isn't that a common trait though amonst FIRE minded folks?

(edit) there's more to it actually. The transactions and receipts i'd have to keep up with would be something done outside of work. Also, i wouldnt risk doing my 1040 at work!

 

[pinkmali]

(edit) there's more to it actually.  The transactions and receipts i'd have to keep up with would be something done outside of work.  Also, i wouldnt risk doing my 1040 at work!


You don't have to do anything with your 1040. The FSA is recorded & adjusted directly on your W-2 similar to 401k(403b?).

Robin

 

[Intuit]

I guess FSA's vary from company to company but with mine, I get a credit card to pay for the expense so there is no out of pocket expense. Also as was previously mentioned, it is an interest free loan. I have already tapped mine and have yet to contribute into it this year. This year mine is set for $1500 for a family of four but we are fairly healthy (knock on wood) and is used to pay co-pays and presciptions. Being pre-tax dollars it does save some money too.

 

[cute fuzzy bunny]

Well this has become entertaining.

As mentioned above, we have an fsa. We stopped contributing to it a month or so ago even though we were told we couldnt. I just submitted an oversized amount receipt to clean out the remainder of the account.

We got back a check for the full amount, not the remainder of the account accompanied by a statement. Statement says "Contribution annual election for 2005: 3000; contributed 2250; used 2575".

Hmm, so we've 'used' more than we've contributed, and 2005 is over.

I wonder how long its going to take for one of the bean counters to find this and how it gets resolved...

Maybe this just makes up for that 'if you dont use it, you lose it' thing...

 

[jazz4cash]

I love my FSA, but as far as I can tell, everybody else is scared to death of it.  Most are hung up on the forfeit part, so here is some things to think about.

We can time things like eyeglasses, braces, dental appointments, etc to line up with needs to use up the funds.

Our heathcare premiums are VERY predictable, so that money goes into the FSA

They relaxed our plan recently so we now have 15 months to use funds (e.g. funds for 2005 can  be used thru 3/31/06, etc.)

They also have a long list of OTC medications (which cost us more than prescriptions thanks to our co-pay)

They make the whole balance available at the beginning of the year, so my daughter's braces got us over 3K at the beginning of the year....its in an interest bearing account.

I did the math awhile back and I figured I was paying 65 cents for $1 worth of healthcare and I know the savings are greater  since we moved to MD from IN.

I fax the administrator an excel spreadsheet, copies of my receipts, and a claim form with my personal information.  I use the "EOB" forms whenever possible instead of actual receipts.  In the claim detail section, I just put "see attached...........not very time consuming at all.


One last thing.  Our plan is seperated into medical and dependent care.  I used the dependent care for years since the childcare expenses were very predictable (3 kids).  I screwed up big time though as I did not realized dependent care benefits terminate "in the year child turns 13". so I signed up improperly.  I begged and pleaded and they refunded all the money as the deferral should not have been permitted..........lucked out!

 

[Craig]

Well, the short answer is you should use it, but based upon your comments, I think you're right ... it's not for you.

Now, I used to get my employees to think again when I told them I'd handle all the paperwork for them, and they could give me 50% of the savings.  Every one I said that to finally signed up.

Figure you'll get back about 30% ... if you run $1,200 through, then you're throwing away about $360.

Easy to manage, by faxing the claim forms / receipts.  You can track on a spreadsheet, but I gave up on that.  Really not a big deal.

Regarding losing that money, that's a fear very seldom realized.  Just estimate low, and check the balance in the fourth quarter ... if you haven't gotten it all back, then move an elective medical expense up ... eye exam, dentist visit, etc.

Note if you have a big, unreimbursed expense in the first few months of the year, you could receive your entire annual reimbursement, BEFORE you've had it taken out of your checks. Your employer is on the hook for that one.

You're throwing away free money, but there is a small amount of trouble.  Worth $360 to me, and I use ours ... as a matter of fact, I've installed FSA's in every company where I've been CFO.

 

[Brat]

My DH's former employer had an FSA. The administrator managed it as if it were their own personal account. Valid applications were submitted but not paid. It wasn't worth the hassle. He shared his experiance with the principals who could not understand why there was no pay-out. DH said, effectively, life is too short. No more FSA for him.

 

[mickeyd]

Back in the day, when an employer thought that by paying me weekly wages that I would consider dropping by on a daily basis, I used to participate in the FSA that was available. I think I agreed to payroll deductions of about $1000 annually. I never left any money on the table, and generally had collected my $1000 back by September.

One thing that I learned in the process of figuring out how much I should agree to have deducted annually is that, industry-wide (Third Party Admin, TPA ), a FSA can be a positive cash flow situation for most employers. That means that, contrary to common sense, many employees sign up for FSA but fail to claim the tax-expemt cash that they have agreed to have deducted from their pay. If unclaimed within the rules, the money stays in the plan, so the employer who runs the plan keeps the cash!

If an employee enrolls in a  FSA, they should insure that they figure a way to get it back. Tax free cash is not always easy to get.

 

[Texas Proud]

I guess FSA's vary from company to company but with mine, I get a credit card to pay for the expense so there is no out of pocket expense. Also as was previously mentioned, it is an interest free loan. I have already tapped mine and have yet to contribute into it this year. This year mine is set for $1500 for a family of four but we are fairly healthy (knock on wood) and is used to pay co-pays and presciptions. Being pre-tax dollars it does save some money too.

Is this an FSA or a spending account The difference is one you must use it or lose it... that is what I think you have..  I have it also and yes, it is an interest free loan if you use it early in the year.. but, there are others who have not used it that is lending you their money..

Opps... sorry.. was thinking about the HSA not the FSA... I think a lot of companies are going to start offering HSAs and they are not use it or lose it accounts..

 

[azanon]

I just generally have a hangup with any system where you effectively pay money upfront with the intention of saving money later.   A FSA would be one example.   Warranties are another.  A club card at Barnes and nobles is another example.

Its all the same.   You start in the hole, and because you know you've got that money you have to spend, you probably end up making doctor visits you'd otherwise not even bother going to.

You see ads everywhere that try to brainwash you that in some kind of scenario, spending money is "saving money".  I'm just amazed at the amount of people that actually fall for it.

So put your 1K in a FSA and "save money".   In the meantime, i'll put my 1K in a hot stock sector and make the same thing you did without the spending obligations.   I realize that "saving" 360, and spending 1K I wouldnt have otherwise in the process of saving the 360, leaves me poorer than just not even bothering with it at all.

I actually have a paranoia belief that everyone's out to get everyone else's money.  Humor me for just a week with that mindset and amaze yourself how throughout the day as to how true that actually seems to be.  They came up with this FSA as just one more strategy to separate you from your money.

I feel like FSA like Dave Ramsey feels about credit card deals. Sure, in theory you might win at their scheme, but if you keep playing with snakes, you'll eventually get bit. They're counting on it. They dont care about you.

 

[Robert the Red]

I just generally have a hangup with any system where you effectively pay money upfront with the intention of saving money later.   A FSA would be one example.   Warranties are another.  A club card at Barnes and nobles is another example.

FSAs are not for everybody. But if you know you'll be buying $100 prescriptions every month, then it's easy to predict a minimum amount to put into the thing. (OK, nothing's completely predictable -- you could die, or be miraculously cured. But these are not highly likely.) If you don't have any predictable needs, then don't use an FSA. Shockingly, different people have different situations -- something that is often overlooked in off-the-cuff discussions on the Internet.