A flexible spending account (FSA) is a great tool to help you save money on health-related expenses. But, for all their benefits, FSAs also have a set of sometimes confusing rules and deadlines. Below, we've identified several of the most-common FSA missteps, and offer a few ideas on how to avoid them.
1. Missing a deadline
The purpose of an FSA is to use your tax-free dollars to offset medical costs throughout the year. But an FSA only saves you money if you use your available funds prior to your FSA deadline.
Many FSAs have an end-of-year deadline, with an FSA grace period of 2.5 months immediately following to spend rollover funds. There's also a run-out period, an option that may be offered by your employer to submit claims from the previous year.
If your deadlines coming, don't panic. There's still hope for you, last-minute FSA shoppers. First, check your FSA balance. Then, take an inventory of your home's medical supplies, so you know what you need to replenish before your deadline hits. Also, be sure to organize and submit receipts from any doctor's appointments or visits to a specialist.
If you don't use your FSA by the end of your plan year, that money is typically returned to your employer. In some cases, you may be eligible to roll over up to $500 of your FSA funds into the next plan year. Or you may even have a deadline extension to allow you to continue using those funds before they're lost, if your plan offers it.
Another potential challenge of an FSA? Deciding how much to contribute. Deciding how much to contribute to your FSA can feel like a guessing game.
Contribute too little and lose out on the tax benefits. Overfund the account and you could find yourself scrambling to spend it before the grace period deadline of March 15 (unless you have the rollover we mentioned earlier). Or, you could lose that money altogether, depending on your plan.
While this can feel like a guessing game, try this strategy to find your magic number:
Total last year's medical expenses, so you have an idea of what you spend on an annual basis.
Keep in mind any copays and deductibles and whether these will increase the next calendar year.
Plan for potential life changes that could be an FSA-buster: like, a pre-scheduled surgery or the birth of a child.
4. Not establishing a budget
Not setting a budget for your FSA is pretty common. But establishing a budget for those tax-free dollars can be as simple as looking at your previous year's healthcare spending.
First, determine which FSA-eligible products you spent the most on, those you were short on, any surprise expenses, and if you ended up using out-of-pocket dollars on any FSA-eligible products. This will give you a clearer snapshot of how to spend your money in the months and years to come.
Then, include any recurring annual expenses, such as medication for a ongoing conditions, allergy medicines, even contact solution. It's also a good idea to factor some extra money from your FSA for unexpected expenditures.
New to FSAs? Need a refresher course in all things flex spending? Our weekly Flex-Ed column gives you a weekly dose of FSA Living 101, offering tips for making the most of your tax-free funds. Look for it every Thursday, exclusively on the FSAstore.com Learning Center.