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?
{ read the comments below or add one }
Interesting. Thanks for the information. I guess my concern would be that if I would elect to put $500 in my FSA for 2014 and not use it, I could stop my election for 2015 and just roll the $500 from 2014 to 2015. I guess that could be one way of reducing my overall taxable income. I will have to do more research. Thanks again.
Martilyo
The Angry Millionaire
My employer got rid of the FSA a year before I came on board. Our health insurance is really good though and I don’t have a lot of out of pocket expenses anyways.
Good info. Thanks! It’s open enrollment time for us now so this post is very timely. Under our current benefits, our employer did not have to offer the rollover FSA for 2014 since they already offer a grace period for filing FSA claims but will be considering it for 2015. I believe with the new change, they are required to either offer the rollover option or a grace period but not both.
I appreciate the information as I wasn’t even aware of FSA. I’ve always been one to stash money away in a savings account for emergencies on my own.
I did not know much about FSAs. Thanks for sharing the post with us. Learned a lot. Thanks mate.
I think it’s great they made the change. We run our own business now, so we have an HSA, but we both had FSA’s when we worked for past employers. it just made too much sense not to.
We no longer have access to a FSA as a small business owner but I really miss the huge savings. Back when my wife and I were employees, we allocated the max to FSA accounts so a good chunk of our salary didn’t need to be taxed. Hopefully one day the government will let small business owners take advantage of this too!