Flexible Spending Accounts
FSAs are a fantastic way to pay for dependent care and health care expenses tax free – a likely savings on these expenses of 25%.
How FSAs Work
- At the beginning of the plan year, you estimate how much you will spend over the next 12-15 months on either health care or dependent care up to a maximum of $5000 for each ($10,000 total) and tell this amount to your employer during your benefits enrollment. Once set, it can’t be changed through the year except for specified life events (marriage, birth of a child, etc.).
- This amount will then be divided equally by the number of paychecks you receive in a year and is deducted from your check before taxes. The money is ‘deposited’ into a type of savings account – more on this later – for your use.
- You spend money on eligible items and either pay with a plan provided debit card that takes the money directly out of the account or you pay with your own funds and request reimbursement from the account.
The benefit here is the before tax statement – let’s take an example assuming you fall in the 25% tax bracket as most residents and fellows will.
Weekly Pay $1000
Weekly Health Care FSA Contribution – $10 ($520/plan year)
Here is what your paycheck would look like with and without an FSA contribution:
Paycheck example without an FSA deduction
As can be seen in the example, adding that $10 to your FSA account only cost you $7.50 thanks to the tax savings! Look at the Net Pay in each example check to do the math – that’s how much goes into your bank account. Note that this example ignores state income tax – if you have that, your savings are even higher. Let’s walk through a couple of examples to drive home the importance of the tax benefits of FSAs.
Paycheck example with FSA deduction
If you purchase contacts, for example, you have two choices – you can pay with money you earned from your job that was put into your checking account (after tax) or with money you saved in an FSA plan (before tax). If you pay with the money in your checking account, that $100 set of contacts costs you $100. If you pay with money from your FSA, it really only cost you $75 because you didn’t have to pay income tax on the income used to purchase the contacts.
Another way to think about it is how many hours you would have to work to pay for the contacts. Although you aren’t paid hourly (perhaps unfortunately..), you can still calculate an hourly wage. Say you work and average of 80 hours a week and your residency program pays $52k/year – an hourly rate before taxes of $12.50 (medical school is really paying off, eh? 
). To pay for $100 contacts, you’d have to work 8 hours ($100 / $12.50/hour). But wait, you paid federal income tax on that $12.50/hour you earned, so you really only get to deposit around $10.50/hour in your bank account after those taxes are taken out. If you pay for your contacts with that money, then, you have to work 9.5 hours ($100 / $10.5/hour) – see the difference not paying income taxes makes??
FSA Drawbacks
Perhaps the only downside to FSAs is their use-it-or-lose-it status. If you contribute $520 to your FSA but only spend $450 over the year, you lose that $70 difference. Congress has helped ease this by allowing employers the ability to allow you 15 months in which to spend your money instead of just 12. The choice is up to the employer, however, if they want to offer this feature.
But let’s think about this example – you had $520 in the account, but it really only cost you $390 in after tax dollars ($520*.75). If you claimed $450 in expenses, you still came out ahead by $60! So while it pays to be prudent and not egregiously over contribute, it’s hard to lose if you do.
Health Care FSA
As the name implies, Health Care FSAs are used to pay for health care expenses. Following are some typical examples:
- Personal vehicle mileage for health care driving (to/from doctor, pharmacy, etc.)
- Over the Counter Medicines
- Pain Relievers
- Allergy Meds
- Antacids
- Contraceptives
- Braces / Orthodontics
- Eyeglasses / Contacts
- Insurance co-pays / deductibles
Contact your provider for a list of covered expenses – there are a lot (including Native American healing ceremonies performed by medicine men).
Dependent Care FSA
Expenses you pay towards care of dependents are covered in this category. Examples include:
- Au pair fees
- Babysitters (can’t be related to family)
- Summer day camps
- Elder care
Again, contact your provider for a complete list of covered expenses.
Side Benefits / Tricks with FSAs
Above, I mentioned that your contribution to your FSA account is taken from each paychecks and is deposited into an account – this isn’t really true. The way it really works is that your employer pays the amount you specify at the beginning of the year to the plan administrator and each paycheck FSA deduction is just reimbursing your employer for their up front payment. This provides two benefits:
- You are allowed to spend up to your chosen dollar amount on day one of the plan year. You said you’d spend $520 over the year – you can go spend that on the first day of coverage and be reimbursed immediately and you don’t have to wait for the entire year of contributions to do so! Basically this amounts to an interest free loan on tax free money – sweet deal all around!
- Although residents and fellows can’t really take advantage of trick, it’s good to keep in the back of your mind. Following the example from Trick 1, say you’ve spent your $520 and have been reimbursed one month into the plan year – you’ve paid in 4 weeks of FSA money ($40) and received $520 from your FSA. Say a month later, your employer lays you off – at this point, you’ve paid in $80 and have received your $520. When you leave your employer, you have no obligation to continue paying your FSA deductions that normally would be deducted from your paycheck. Basically, you just got $440 of free health care costs. Imagine if you got laser eye surgery for a couple grand instead of just $520 worth of contacts..Although this may seem a little sketchy, it’s the way the programs are set up. As noted above, the funds in these accounts are use it or lose it, so think of how much is left in these accounts that aren’t spent – the theory is that it all evens out.
What We Did
I don’t have many recurring medical expenses, so I only put in about $100/yr to my FSA for random over the counter drugs. Andrea puts in a little more for contacts, but that’s about it. It’s a great benefit if you have these expenses or know about upcoming expenses for the year. Throwing a little bit in just for random expenses never hurts, though!
Tags: benefits
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