Figuring out how much to contribute to your FSA is a bit like deciding how much food to bring on a backpacking trip. Once you get out in the wilderness, you're stuck with the rations you've brought - if you packed too much, you may have to toss it along the way. If you packed too little, you'll have to end the trip early.
Because you can't change FSA contributions mid-year unless you have a qualifying event, like changes in marital or work status, it pays to contribute the right amount. Contribute too little and you may end up with some hefty out-of-pocket expenses.
Contribute too much and you'll be faced with a dilemma - roll over up to $500 to the next year or try to spend the remaining balance in the first two and a half months. Everyone has a magic number for how much they should contribute to their FSA. Here's one way to find yours.
Go through last year's expenses
The best way to decide how much to save for health care expenses is to look at how much you spent the previous year. Log on to your insurance account and see if you can find the total amount you paid, not including monthly premiums.
Include how much you spent for all medical expenses, such as glasses and contacts, prescriptions, counseling and therapy visits, medical devices, dental visits and more. Then, examine those expenses and determine how common they were. If your only visits to the doctor were because of ordinary problems like the flu or sinus infection, you can probably estimate this next year will be the same.
If you ran into a major health problem, you should evaluate if next year will be similar. Some issues, like diabetes or asthma, require more-frequent doctors' visits. Others, like appendicitis, happen once a lifetime.
If you had a costly medical emergency, consider the likelihood that it will occur again and whether or not to include that figure in your estimate.
Compare health insurance plans
Even if you're signing up for a similar health insurance policy, the deductibles, copays and coinsurance rates might change from year to year. Compare the figures to see if you'll be paying more and adjust your FSA contribution accordingly.
For example, if your health insurance copay is increasing from $40 a visit to $60, add up how many visits you made last year and multiply them by $20.
Think ahead about major procedures
Sometimes you know about major operations and procedures ahead of time, so you can plan ahead. If you know this is the year when you're going to get LASIK surgery or finally get your knees replaced, call the insurance company to get an estimate of those costs.
Most of the time you can get an accurate idea of the expenses you're facing. If the insurance company can only guess what your costs might be, go with the higher end of the estimate. This way, you'll be covered in case you end up paying more.
What if you picked the wrong number?
If you end up saving more than you needed, ask your HR rep about the company's rollover policy. Most will either let you roll over $500 or give you a grace period of 2.5 months to spend the remainder. If you saved too little, try upping your contributions next year to maximize your tax-free benefits.
Finding your FSA magic number is essentially, a guessing game. Don't be surprised if you estimate too much or too little the first time you do it. It's all about taking charge of your finances and making the most educated guess possible.
From FSA basics to the most specific account details, in our weekly Asked and Answered column, our team gets to the bottom of your most-pressing flex spending questions. It appears every Wednesday, exclusively on the FSAstore.com Learning Center. And for the latest info about your health and financial wellness, be sure to follow us on Facebook, Instagram, YouTube and Twitter.
Flexible spending account (FSA) and health savings accounts (HSA) will see a number of important changes from the regulations set forth in the bill. These include:
- Repeal of the OTC Rx requirements for FSAs/HSAs:
The OTC Rx provision was originally included in the Affordable Care Act (ACA), and the Better Care Reconciliation Act will fully remove the provision for FSA and HSA users to obtain a prescription for OTC drugs. The proposed effective date is for expenses incurred after December 31, 2016.
- Repeal of the FSA maximum contribution:
As of 2017, FSA users could set aside up to $2,600 as single individuals and $5,400 for families to cover qualifying medical products and services during their current plan years. The Better Care Reconciliation Act would allow the plan sponsor to set whatever maximum they wish. The proposed effective date would be for plan years beginning after December 31, 2017.
- HSA yearly maximum contributions would increase:
HSA contribution limits have grown steadily in the past decade adjusted for inflation, growing from $3,050 for single individuals in 2010 to $3,400 for single individuals in 2017. The Better Care Reconciliation Act will almost double these limits for HSA users to $6,550 for single individuals and $13,100 for families. The effective date for qualified HSA contributions after December 31, 2017.
- HSA catch-up contributions expanded
When an HSA user reaches middle age, he/she is able to make a catch-up contribution (up to $1,000) to save in excess of the yearly contribution limit on an annual basis. The proposed legislation would keep these HSA catch-up contributions in place, but they would now be allowed for both spouses age 55 and up, as opposed to restricting contributions to the HSA holder alone.
- HSA tax penalties reduced
The Better Care Reconciliation Act also revamps the tax penalty for use of HSA funds on non-qualified expenses. Today, if an HSA user before the age of 65 withdraws HSA funds to cover non-qualifying expenses, he/she would be charged a 20 percent penalty on that amount. The Better Care Reconciliation Act would restore this tax to non-qualified HSA distributions to the pre-Affordable Care Act amount of 10%. Special rules that would allow some expenses incurred prior to the establishment of the HSA to be qualified as well.
- Further extension of the Cadillac Tax:
The Cadillac Tax is a 40% excise tax on the value of coverage exceeding set thresholds that was set to begin in 2020, which currently includes contributions to FSAs/HSAs. The tax was designed to be levied on only the most expensive employer-sponsored health insurance plans—the so-called Cadillacs of health coverage. This regulation was one of the more controversial aspects of the ACA, as while it is a tax on insurance companies, it was feared that these increased costs would be passed off onto employers, and eventually the employees themselves (IB Times, 2015). The Better Care Reconciliation Act would further delay implementation of the tax to taxable years after December 31, 2015.
The Senate is expected to fast track The Better Care Reconciliation Act for a vote before the July 4th holiday. The Congressional Budget Office (CBO), that rates proposed legislation to include potential cost and impact, has promised a score on the new bill early next week.The bill is expected to face challenges with four Senate Republicans currently voicing concern with the bill. In order for the bill to pass, no more than two Senate Republicans can vote against it, and Vice President Mike Pence would be the tie-breaking vote in the Senate if no majority prevails.