"FSA" stands for Flexible Spending Account. Many companies offer them as part of their benefit package. And if you’re eligible but not using one, you could be missing out on a way to reduce your health care costs.
An FSA lets you set aside pre-tax dollars from your paycheck to pay for health care costs that are not covered by regular health insurance. As well as paying for deductibles and co-pays, you can use your FSA dollars for a range of other health care expenses. These include eyeglasses, dental work, over-the-counter medicines such as aspirin and cold remedies, and even band-aids.
Dollars you put into your FSA don’t count as taxable income, so you save the tax you would have paid on those earnings. Sometimes there’s a secondary benefit. Because your income is lower, you might find yourself in a lower tax bracket or eligible for tax breaks that phase out at certain income levels.
FSAs have one drawback. It’s called “use it or lose it.” You’ll forfeit any unspent money in your FSA at the end of each plan year. Some companies have a 12-month plan year, usually ending on December 31. Other plans allow you an extra 2½ months beyond year-end to spend the prior year’s balance.
With a little planning, you can use up your dollars without much problem. Buying a new pair of glasses, scheduling a dental check-up, or stocking up on flu medicine usually takes care of any unspent funds.
If your company offers an FSA, it’s worth looking into. Check with your benefit coordinator to see what items are covered and to find the plan limits. Then make a realistic estimate of what you typically spend on unreimbursed health costs in a year.
Note that generally you can’t pay for vitamins, health supplements, or cosmetics from your FSA. Add in any special expenses that you know are coming up, and set your payroll deduction accordingly.
Note: FSAs can be used to pay child care expenses with tax-free dollars, too.
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