Flex Account General Information
One of the few ways workers can cut out of pocket medical expenses is through medical flexible spending accounts (aka, flex spending account or FSA). A medical flex account is an employer-provided benefit that allows you to contribute a set amount from your paycheck in order to cover out-of-pocket medical, dental, and vision expenses such as health insurance co-pays, uninsured treatments, or even over-the-counter drug purchases.
The funds are usually deducted through regular, equal payroll deductions. The good news is that money deposited in a flex account is exempt from federal, state, and payroll taxes. Because taxes are not calculated on your contribution, your paycheck is not reduced by the full amount you set aside. Using this concept of “pre-tax” dollars can reduce your medical costs by as much as 30% depending on your tax bracket. Let’s say you have a $100 per pay period deduction….your actual check may only be $75 smaller because a smaller amount of taxes were withheld.
You also have the feature of being able to get to the money before the full balance is even in your flex account. Let’s review the following example:
Example: You elected to put $3600 in your flex spending account which is deducted in $300 increments from each of your twelve monthly paychecks. In April, your daughter falls off the balance beam in a gymnastics competition and breaks her ankle and has extensive ligament damage. When the health care bills start rolling in, you have totaled $1100 in deductibles not paid by your employers insurance and must be paid out of your own pocket.
Potential Pitfalls in your Flex Spending Account
Unfortunately, use it or lose it and medical flexible spending accounts discourage many workers from participating. The Employee Benefits Research Institute reports that employees with medical flexible spending accounts deposit an average of more than $1,100 annually and an average balance of $100 is left in the accounts. No doubt, the key is to accurately predict your health cares spending so no dollars are sacrificed in the end. You also don’t want to be forced to participate in last minute spending on marginal health care items to spend your flex spending account dollars.
It is also important to point out that unless there is a major change in your life (normally dictated by your employers plan document), IRS flex spending account rules maintain that you are stuck with putting in what you chose during the enrollment period.
One last note….employees that have balances in their medical spending accounts during the year and leave their jobs (voluntarily or otherwise) will lose any unspent flex spending account funds.
Other Flexible Spending Account Rules & Guidelines to Consider
The most common type of FSA is used to pay for medical expenses not paid for by insurance; this usually means deductibles, copayments, and coinsurance for the employee's health plan, but may also include expenses not covered by the health plan, such as dental and vision expenses and over-the-counter drugs including a first aid kit. A medical FSA cannot pay for health insurance premiums, cosmetic items, cosmetic surgery, controlled substances (in violation of federal law), or items that improve "general health". All items must be intended to treat or prevent a specific medical condition; this can be as significant as diabetes or pregnancy, or as trivial as skin cuts. Generally, allowable items are the same as those allowable for the medical tax deduction, as outlined in IRS publication 502.
The annual caps for a medical FSA varies by employer. Unlike dependent care FSAs, there is no IRS cap on medical FSAs, but employers generally limit the annual amount each employee may contribute, in order to reduce the risk of pre-funding. Should the employee leave or be terminated and thus no longer pay in to the plan, the employer does not recapture their pre-funding from the employee's payroll deduction.
Flexible Spending Accounts debit card allows for the automatic electronic transfer of pre-tax dollars from an employee account when paying for qualified expenses. Employees are able to receive immediate reimbursement of their medical, dependent care, and commuter expenses simply by using their card at the point of service. The normal paper claims process is eliminated, as are worries of forgotten purchases or lost receipts.