6 Reasons to Consider Getting a Flexible Spending Account
According to the National Compensation Survey, courtesy of the Bureau of Labor Statistics, nearly 48% of workers had access to a flexible spending account, or FSA, in 2013. What is a flexible spending account? It is a financial account established through your employer in which you set money aside to pay for a range of out-of-pocket medical costs. It can be used for prescriptions, doctor visits, and health-related supplies, such as crutches.
You can contribute as much as $2,550 to an FSA for the year 2015 - contributions that are taken out of your paycheck pre-tax. In order to avoid taxation on those funds, they must be used for qualified expenses. One catch though: If you don't use FSA funds by year's end, you may lose them. Some FSAs allow a rollover of up to $500 to the next year, but many do not.
- Avoid Financial Emergencies When's the last time you got advance notice of a major illness? Setting money aside for medical expenses means reducing your chances of being hamstrung by a medical emergency you can't pay for out-of-pocket. For many folks, those emergencies mean assuming a frightening amount of credit card debt. If you're not setting aside funds, you could end up doing serious damage to your overall financial picture.
- Automate Healthcare Savings As with many things in life, it's easy to tell yourself that you should be saving for healthcare expenses, but quite another to actually do it. Since your FSA contributions are automatically deducted from your paycheck, however, you won't be tempted to skip a month of contributions in favor of that new iPhone or fancy dinner out.
- Tax Break Since FSA contributions are made from your pre-tax income, you keep more of your hard-earned money in your pocket. Just be sure to use all your contributions for qualified medical expenses that year. If you lose them, the financial benefits of the plan are moot.
- Variety of Covered Expenses Expenses covered under flexible spending accounts are comprehensive. You can use funds for physicals, prenatal vitamins, X-rays, deductibles, co-insurance, copayments, blood pressure monitors, and birth control - and that's just the tip of the iceberg. Over-the-counter medications such as Tylenol, however, are only eligible with a prescription from your doctor.
- Convenience Many flexible spending accounts come with debit cards, which makes paying for your medical expenses that much more convenient. It also eliminates the need to keep track of your available balance, as this is done automatically for you.
- Your Account Is Pre-Funded One lesser-known aspect of flexible spending accounts is that they are pre-funded by employers. What does that mean? Let's say you sign up to have $2,000 contributed to your account annually, or roughly $83 from every bi-weekly paycheck. That doesn't mean you only have access to $83 if you get sick in the first two weeks of January - your entire $2,000 is available from the beginning of the year.
Since you may lose any funds you don't use during the year (unless you have a Carryover or Grace Period option), be sure not to contribute more to your account than you expect to spend. If you're in danger of losing cash, for example, schedule a physical in December, or any other covered procedure before the new year. An FSA can strengthen your financial and physical health, so if one is offered through your employer check out what's covered and determine how much you expect to spend in each category. Then, set one up as soon as possible.
Dale Conner is a personal finance writer who discusses topics related to investing, retirement, health, and insurance.