I first heard about Flexible Spending Accounts (FSAs)  a few years ago when my company began offering them as a benefit.  These accounts offered a method for employees to pay for medical and dental expenses that are not covered by insurance using pre-tax dollars, and can offer significant savings if used properly.

While intrigued, I was reluctant to sign up for an FSA because of the fact that if you don’t use the money in the account by the end of the year (and a brief grace period), then you lose it.  This seemed like a major risk.  It isn’t just a “benefit” that you lose if you don’t use it, this is real money that is withdrawn directly from your paycheck.  Because of this reality, at the end of the year you will often hear advertisements from businesses pushing Lasik surgery or dental procedures, reminding customers to spend the money left in the FSAs while they still can.  So with this risk in mind, is a flexible spending account worth it?

Throughout this year, Michelle and I  have applied vigor to every single financial decision that we have made, and this includes carefully examining the options for employee benefits that my company provides.  I wrote recently about deciding between the standard plan and the “consumer driven plan” for our medical insurance, and after crunching the numbers, we decided to stick with the standard plan for this year, but to closely monitor what our costs would have been had we had selected the other option.  I should note that thanks to a comment from one of our readers, we realized that we had an out of pocket maximum on either plan that would prevent us from being completely ruined by a medical emergency, which was a great think to learn.

After doing some research, it was clear that Flexible Spending Accounts can actually be a nice supplement to your health care plan regardless of which option you choose.  If you use a standard health insurance plan, an FSA can cover your co-pays and deductibles.  If you opt for a consumer driven plan, the FSA will lesson the pain of the “donut” period that hits after your HSA has been exhausted and you are required to pay for the medical costs in full.  By allowing you to pay with pre-tax dollars,  you are significantly increasing your purchasing power!  The following items can all be paid for using using an FSA  (Note: This varies plan by plan):

• Medical, Prescription, Dental, and Vision Copays
• Medical, Prescription, Dental, and Vision Deductables
• Orthodontia
• Laser Eye Surgery
• Over the Counter Medicines and Supplies (bandages, braces, lactation devices, dentures, contacts, tests & monitors), family planning items, first aid supplies, diabetic supplies, bandages & wraps, reading glasses, sunscreen, wheelchairs, nearly all prescribed medicines.

The amount of money that you can contribute to an FSA is capped at $2500 this year, which is half of what was allowed in previous years.  You must sign up for the plan before the year, and you cannot change your mind once the year has begun.  On January 1st, the $2500 is deposited into a savings account which you can draw from throughout the year.  The full amount is then divided by the number of paychecks you receive in a year, and that amount is taken out of each paycheck with pre-tax dollars.  At my place of employment, the plan also provides a debit card which can be used for any FSA eligible expenses,  including co-pays at the doctor, dentist, or eye doctor or any of the other items mentioned above.  This means that you shouldn’t have to submit any paperwork or anything to get reimbursed, which is a huge bonus (although you should certainly save your receipts).   Of course, an added benefit to allocating tax free dollars in this fashion, is that it reduces your overall tax burden.  The less taxable income you have, the lower the amount of taxes that you will owe.  If you are lucky, perhaps this will even drop you into a lower tax bracket.

After carefully going over our numbers, my wife and I determined that the  $2500 number sounded pretty reasonable for our family of five.  We expect our actual medical costs to fall somewhere right around that amount, it is pretty awesome that we can manage this portion of our finances with tax-free income.  If our actual number falls below that $2500 marker,  we have a couple of family members that may need braces in the next few years, and we can certainly go ahead and get that process started with the remaining amount.   It would be an absolute no-brainer to go this route if we had a large medical expense on the horizon (a surgery or a childbirth, for example), but without that– is really feels like we have an answer for our “is a flexible spending account worth it?” question.  It seems like a great option  for the ordinary medical expenses that our family incurs.

Regardless of how it goes, we will keep you updated with our Flexible Spending Account experiment as it unravels here at See Debt Run.   Do any of you have experience using an FSA?  Have you ever had money left over at the end of the year?