Just a quick note to say that we’ve drained our flexible spending account (FSA) for 2007. Given that we set aside $1200 pre-tax dollars, we saved somewhere in the neighborhood of $475 this year (33% federal tax bracket + 6.5% state tax bracket). While going through our open enrollment paperwork, I decided to bump our FSA contributions up to $1500 for next year. Given how things have gone this year, we should easily hit that mark. Nonetheless, I’m reticent to push things too far given the use-it-or-lose-it nature of flexible spending accounts.
A few random notes… First off, we’re going to get an FSA debit card this year, which means we won’t have to file paperwork to get reimbursed (as long as we remember to actually use the card). Also, I should point out that we actually closed out our FSA at a profit last year since I switched jobs mid-year. Oddly enough, this is exactly how FSAs are supposed to work. If you don’t spend your money, your employer keeps the difference. If you spend it faster than you put it in and then quit your job, you keep the difference.
I didn’t see any comments on the following. I’m trying to understand the logic of the FSA and specifically the USE IT or LOOSE IT aspect of it. Any comments?
Why don’t they just change the tax law so that you can deduct the same things you can claim on FSA? Wouldn’t this have been much much easier and even better system that the FSA system?
It’s just such a huge burden to have to worry about budgetting and spending or loosing what you budget. It also causes a lot of waste as many people end up buying things they don’t want or need, while others might wait to get medical treatment that they would otherwise get right away (for example, if my back hurts in December, I might wait until January to see a chiropracter so that I can make the claim.) We work for our money (some people even work hard for it). Why should the FED “make†us play games like FSA when it’s not necessary?
I just don’t understand it.
Does anyone know how returns work with FLEX money? I just bought a really expensive pair of reading glasses in an effort to spend every last dime of my FSA, but I am considering returning them and requesting that they give me cash rather than issuing the return back to my FSA debit card. Would this be tax free money?
I’d love a debit card, I get so tired of sending in documentation and filling out forms. I also find my FSA provider to be really weird about denying covered costs. I only use my account to cover prescription drug co-pays, doctor co-pays, dental co-pays and lab test costs and the plan, of course, covers all of those costs but sometimes randomly denies some of those costs (for what reason I can’t figure out). I think the FSA benefit plan makes sense for lots of people but the administrative time and pain in the butt factor is a negative.
Robert asked about taking eligible expenses at the end of the year and Nickel replied that medical expenses are only reimburseable if you itemize deductions.
A twist on this question: Why don’t they just change the tax law so that you can deduct the same things you can claim on FSA? Wouldn’t this have been much much easier and even better system that the FSA system?
It’s just such a huge burden to have to worry about budgetting and spending or loosing what you budget. It also causes a lot of waste as many people end up buying things they don’t want or need, while others might wait to get medical treatment that they would otherwise get right away (for example, if my back hurts in December, I might wait until January to see a chiropracter so that I can make the claim.) We work for our money (some people even work hard for it). Why should the FED “make” us play games like FSA when it’s not necessary?
I just don’t understand it.
I plan on enrolling in my company’s FSA program this year too. I don’t have too many medical expenses aside from a daily, regular prescription and copays for doctor visits. However, I do need new glasses and contacts and an eye exam, and I figure this might be a good way to save some money since my company doesn’t offer eye insurance. It’s my first time enrolling, so I’m curious how it works. I think I’ll get the debit card too.
It’s quite hard for me to justify FSA right now since I’m a single 28 year old male. I hope they make it even better for people like me in the coming years though so we can save even more money 🙂
I’m terrible about budgeting my FSA, but since I don’t have a family. It only amounts to a couple hundred dollars a year I need to worry about. Always end up making a drugstore run at the end of the year.
I have FSA a debit card – much better than filing for reimbursements.
Another caveat is that if you pay for expenses out of the FSA, you can’t count them toward the 7.5% AGI floor.
Robert, you can only deduct medical expenses if you itemize deductions. Moreover, as pointed out in comment #10, you can only deduct medical expenses to the extent that they exceed 7.5% of your AGI.
I think my question was missed. How is an FSA better than paying for eligible expenses normally and then taking a tax deduction at the end of the year?
Robert, if you take the tax deduction, you lose the ability to take all of it because it is subject to the 7.5% of AGI floor. Only amounts above this count for the deduction. If you use the FSA, you can get all of it pre-tax. You will come out ahead with the FSA.
Jeremy: I don’t understand the question. In Quicken, I have an account into which I transfer my contributions from each paycheck. I then transfer this money out to checking when I filed for reimbursement (my employer does direct deposit so it goes straight to checking).
The tax savings come at year’s end when you file taxes. There’s no need to account for this in any special way. You tax bill will just be smaller than it would’ve otherwise been.
Quick Question: Been using an FSA for a year now and still confused about how to make this work in quicken since I am trying to make sure every available penny goes to savings. Nickel mentioned what he is saving in his tax bracket. Do I just take the transaction and cut the % off and transfer it to savings?
I just signed up for a FSA starting in January. I am saving $1200 a year to start and will easily use that up.
Didn’t think unused funds went back to your employer…I thought it was engrossed by the federal government. Neither is an attractive choice, but given my mood about the university’s disastrous PeopleSoft scheme and the totally demoralizing payroll fiasco that has ensued (and is still under way), I think I’d rather have the feds, not Our Beloved Employer, have it.
My problem with these accounts is that I NEVER, EVER manage to guess accurately at the amount of eligible expenses I will have over the following year. Also, apparently I don’t earn enough for these pre-tax deductions to make any difference in my tax bill–or at least, enough of a difference to make it worth the hassle.
The last time I used O.B.E.’s plan, they had changed providers. The new provider disallowed a bunch of things that had been accepted in the past, and so I ended up having to pay for an expensive item out of pocket, which I had expected to be covered. And so once again, at the end of the year I had to run out and buy a couple pairs of prescription glasses that I didn’t need or want, just for the sake of using up the FSA.
I need several hundred dollars worth of dental work in the near future, which I put off, planning to re-up for the FSA to cover it. But…that means $40 or $50 out of my monthly cash flow, which as a university employee I sure as heck can’t afford. Think it would be better to just pay for it out of emergency savings. Then at least I’ll have enough in my paycheck to cover the power bills next summer.
How is an FSA better than paying for eligible expenses normally and then taking a tax deduction at the end of the year?
I can definitely see abuse if you allowed the account to perpetually grow. An easy way to work around this would be to refund any money left in your account to you at the end of the year minus any taxes that would have been taken out.
The other perspective is – so what if the account grows? You’re still only able to use it on approved costs…so it further insulates you from paying a lot of out of pocket for catastrophic events that would exceed your max benefits. Plus, your account is likely to be low at the end of the year – so any big expenses in mid-late December are going to effect you more than if they would have occurred earlier in the year.
This is a wonderful benefit, but they just didn’t get it 100% right.
I believe that the rule is in place to stop people from piling up a huge amount in their FSA by contributing year after year. That being said, it would be easy to say that your contribution limit in a given year is:
Current limit – amount remaining in account
The challenge here is that you have until well after open enrollment to claim your FSA contributions from the current year. Nonetheless, I can imagine workarounds that would make this work.
I always thought that the use-it-or-lose-it rule was really silly. Up until I read this I didn’t know who got the unused funds. I only could guess that the unused money was rolled over to the government.
Knowing that the money goes to the employer _or_ employee based on employment status this law seems even sillier.
Do you know why this restriction is put on FSAs?
While the FSA Debit card is nice, you still have to keep your receipts. Odd are you will still need to send them in for most purchases. At least, that’s what I’ve found to be true.