In case you’re not familiar with the term, flexible spending accounts (FSAs) are employer-offered healthcare accounts that allow you to set aside and use pre-tax pay for miscellaneous healthcare expenses not covered by your insurance.
While the concept of setting aside funds for medical incidentals sounds like a great idea, only about 20% of employees that are offered FSAs take advantage of them. This is due to the fact that, in the past, the government enforced a “use it or lose it” policy. In other words, if you hadn’t spent your FSA by the end of the year, you’d forfeit it.
This was a discouraging policy, since healthcare expenses are as unpredictable as the future. The government, however, was concerned that if participants were allowed to set aside and roll over an unlimited amount of pre-tax funds, they’d be more likely to abuse the funds for non-medical purposes.
But, there’s recently been a change to the 30-year-old FSA policy: FSA participants will now be allowed to roll over up to $500 for the following year’s expenses.
The State of FSAs Today
This favorable change is mostly due to pressure from businesses and healthcare advocates, many of whom have been pushing for it for years. In today’s uncertain market, it comes as a welcome adjustment to a healthcare expense safety net.
Even though most FSAs are offered as part of non-traditional and pay-as-you-go approaches to healthcare that include Health Savings Accounts (HSAs) attached to High-Deductible Plans (HDPs), they’re increasingly being offered in conjunction with traditional healthcare plans. In the face of increasing healthcare costs, this is an important step. Even better, the change in policy is taking effect immediately, so most participants will be able to roll over unused 2013 funds into next year.
Your Alternatives to FSAs
You may be thinking, “That’s great, but my employer doesn’t offer an FSA with any of their benefit plans.” While there’s currently no way to open a flex-spending account privately, you can always save on your own. Though, of course, this takes more discipline and planning than simply approving an amount to be withheld from your payroll each week.
The money you set aside won’t be pre-tax dollars, but you may be able to claim certain out-of-pocket medical expenses as a deduction on your tax return. Be sure to save the money in a way that’s easily accessible when you need it (but not so accessible you’re tempted to use it for other spending). If you place the money in a savings account, you can even earn interest. Be sure not to place all of it in a high-risk investment fund.
And while you may not be able to use a FSA right now, it may only be a short time before your employer offers it as an option. Due to their rise in popularity, nearly 90% of employers now offer FSAs.
If you have the option and haven’t enrolled because of the use-it-or-lose it policy, now there are fewer excuses not to protect your budget from out-of-pocket medical expenses in the upcoming year.
Do you contribute to a FSA? Why or why not?