Health Care Flexible Spending Account (FSA)

by David Ning · 4 comments

With my wife’s job change comes the addition of flexible spending accounts (FSA) for us to consider.  A few days ago, we looked at the dependent day care FSA so let’s round up the discussion by looking at the health care version today.

Health Care Flexible Spending Account

With any FSAs, the main benefit is of course the fact that anything you spend on health care is from pre-tax dollars.  While it’s arguably more work involved on our end to set this up, the cost savings benefit far out way the hassle.  Also note that for you and your dependents do not necessarily have to participate in your employer’s health plan in order to participate in their FSA.

How it Works
There are generally a few steps involved in the whole process:

  1. Towards the end of the year, estimate how much you and your dependent’s out-of-pocket medical expenses will be for the following year and elect that as your annual amount.
  2. An equal portion will be divided and taken pre-taxed from your paycheck towards the FSA.
  3. Whenever you incur medical expenses, submit a claim directly to your FSA or use your debit card (more on this below)

Ways to Get Your Money
In the old days, the only way used to be to submitting your claim by filling out a form and including all your documentation.  This is followed by some days of waiting for checks to come just so we can line up at the bank to deposit it.

Direct Deposit
Nowadays, many providers allow us to setup direct deposit.  So at least we don’t have to wait for that check and wonder if it got lost in the mail.

Debit Card
Another relatively new option is the FSA debit card.  The convenience of this is amazing because you can just use the debit card as the form of payment and all FSA-eligible items will be deducted.

Do note however that while the IRS has required department stores, discount stores, and supermarkets to have the system in place to automatically determine eligible FSA items on the fly by the start of 2008, retail pharmacies have until the start of 2009 to do so.  So take care in reviewing your receipts to make sure that all eligible items are being deducted correctly while all systems are either not implemented yet or relatively new.

Some Important Points to Consider

  • Save all your receipts.  Your FSA provider may request for additional documentation for verification.  Also remember that you still need to submit the receipts after you use your debit card for the purchases or else those expenses will be considered ineligible.
  • You will receive the full amount of your FSA annual contribution even if your payroll deductions have not reached the full amount.
  • Note the submission deadline for your claims because claims submitted afterwards may be deemed ineligible.
  • Unlike the dependent day care FSA, the IRS does not cap the contribution limits of the health care FSA.  However, your employer may have a limit so remember to find out.
  • Remember your annual contributions and don’t waste unused portions because you lose what you don’t use.
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  • Melanie says:

    I know this is a fairly old post, but I will be starting a second job soon. I maxed out the FSA limit at my day job. Can I take advantage of the FSA at the second job or will I be exceeding some federal limit? I have a chronic illness, so I have significant annual medical costs.

    • MoneyNing says:

      The FSA limit is set by the IRS, so no, you cannot have more than the annual limit even if you change jobs. Furthermore, most companies only allow you to enroll in the program once a year so you have to wait until the next go around anyway.

  • bartolomo says:

    Good info. If you don’t use FSA, you’re paying taxes you don’t need to pay.

  • Jess says:

    I will be going into my third year of utilizing a Health Care FSA and I LOVE IT… My employer also has a fund that it splits amongst the employees who sign up and we will receive an additional $50 (at least) in our FSA. I was only disappointed when I used up all of what I had allocated before the 4th quarter. 🙁

    I can say I’ve only ever had to submit one or two receipts, but I always hang on to them. The only pain is, if I purchase multiple items, I have to split up my order at the check out. Otherwise, I’ve found it to be a smooth process (though, in the past, I had heard otherwise, but things are continually improving).

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