We recently answered questions about Flexible Spending Accounts. Used correctly, Flexible Spending Accounts (and their closely-related cousins, Health Savings Accounts) are a great way to save on health care costs by paying for them with pre-tax money. If you want to contribute to an FSA, you do so by electing to have a certain amount diverted from your paycheck into a separate account. You do this during open enrollment, the time each year that your employer allows you to choose benefits.
Funds in FSAs are “use it or lose it,” meaning that the amount you set aside can be used for medical expenses in the given year only, and is forfeited when the year passes (although most employers and the IRS allow for a grace period of 3-4 months). Because of the possibility of losing you funds, you don’t want to set aside too much – but because of the chance to save on medical expenses in an amount equivalent to your tax bracket, you don’t want to save too little either.
How Much Should You Save in Your FSA?
Follow these steps to determine the amount you should set aside for medical expenses in 2012. FSA funds can be used for you, your spouse and dependents. Make a quick list of each person and then jot down known/planned medical expenses for each by considering the following questions:
- Do you know what can be covered by an FSA? In addition to traditional medical expenses like doctor’s visits and prescription drugs, FSAs can be used for expenses like fertility treatments, chiropractor visits, some baby-related expenses, and addiction recovery programs. Be sure you know what can and can’t be purchased with FSA funds before you start your calculations. As a tip, over-the-counter drugs and supplies are on the “can’t” list, unless you have a prescription.
- What recurring prescription expenses do you have? FSAs can be used for co-pays and any additional out-of-pocket responsibility for prescription drugs. So if you have a recurring prescription you can use FSA funds for your portion of the expense, regardless of the amount. Write down each of the prescriptions that members of your family refill on a monthly or quarterly basis, and calculate the associated out-of-pocket costs (those not covered by insurance). This may be a flat co-pay, like $10 per prescription, or a varying cost depending on the drug’s price. Use previous pharmacy bills or contact your insurance provider and/or pharmacy for help with this step, and make note of the total.
- How many known doctor’s visits will you make this year? Unplanned doctor’s visits come up all the time. But every member of your family probably has at least one planned appointment per year. You should set aside money for co-pays on known doctor’s visits – like your child’s 2-year-old check-up, or your annual physical. Remember that vision and dental expenses can also be paid for by an FSA – so if you don’t have vision or dental insurance (or it doesn’t cover all of your costs), include the cost of annual teeth cleanings and vision exams for each member of your family. Once again, depending on your health insurance plan you may pay a flat co-pay of $10-20, some portion of the actual cost of the visit, or some combination depending on the type of doctor (GP vs. specialist, routine appointment vs. special occurrence, etc.) – check your plan to determine how much to set aside for each visit. Add up the total cost of known visits and add it to the total from Step 1.
- What one-time expenses might you have? For instance – do you have a child who will get braces this year? Are you or your spouse having a birthday that will require you to have more tests (colonoscopy, mammogram, etc.) than usual? Are you expecting to give birth? Some one-time costs may be totally covered by insurance (many preventative exams such as mammograms are), but others, such as braces, might come with a rather hefty cost. Research the expected out of pocket costs for each planned procedure and add them to the running total from Steps 1 and 2.
- What did you save (and what did you actually spend) historically? Compare medical expenses from previous years with those that you have planned on for next year. Use last year’s spending as kind of a checklist to make sure you’ve included all of the things you normally spend money on, including medicines like asthma inhalers that may only be replaced once or twice per year. If you have traditionally saved more than you needed, make sure you are saving less this year – for instance, if you always save for 2 dental appointments but only make it to one, don’t save the money for two – you’ll end up losing it. If you haven’t actually followed through on pushing your medical expenses through to your FSA for reimbursement, come up with a more-organized way of doing so – or don’t set aside the money in the first place. Recognize also that your needs might have changed – if your adult child got his or her own health insurance, you will not need to use your FSA funds for their expenses, and should reduce your savings accordingly. Finally, add a cushion to the planned spending from items 1-3 to account for irregular expenses like antibiotics or trips to the doctor for a cold: reviewing historical expenses can help you decide how much, but $30-$40 per person should take care of one unexpected doctor’s visit and resulting prescription- save more if any member of your family has a chronic health condition.
- Is your plan an HSA? If you have an HSA rather than an FSA, you won’t lose unused funds – so you can afford to err on the side of oversaving. And as we’ve discussed before, saving extra now will give you another way to pay for medical expenses or long term care in the future. Don’t contribute more than needed at the expense of college or retirement savings, but if you have a little extra money to throw in an HSA, do it.
- What is your plan’s maximum? The IRS will limit FSA savings to $2,500 per employee beginning in 2013. In 2012 your savings may be limited by your employer or specific plan. If your planned savings as calculated in steps 1-5 exceeds the allowed maximum, save the maximum. Otherwise save what you have calculated.
Finally, don’t forget to review any changes to your insurance plans. If your plan is raising copays, deductibles, or coinsurance amounts, you’ll want to adjust your flexible spending account contributions accordingly. Then, be sure to use all the money in your flex plan. For ideas see 12 Ways to Use Up All of Your Flex Spending Account.