Reduce Healthcare and Dependent Costs with the Help of Uncle Sam: Using Flexible Savings Accounts

Both dependent care and flexible medical spending accounts are funded by pre-tax deductions from your paycheck. Both have a “use or lose” policy if the deducted funds are not used in the calendar year for which the election was made.

Typically, an individual can only elect to have these deductions taken at the time of hire or during the annual enrollment period that each company offers its employees to make changes to their health and wellness benefits. (There are also other times during certain “life events,” such as marriage or the birth of a child, when benefit choices can also be changed.)

Since the election to make these deductions is made for a full year, great care must be taken with the amount chosen. If you do not use the funds for eligible expenses in the allowed time period, you will not be able to get the money back.

For those with young children or older parents who need day care, the Dependent Care FSA can be helpful. The maximum amount that can be reserved is set at $ 5,000 each year. Since the costs of child care and adult day care are the same, an employee is not likely to end up without using the full reserved amount, so it makes sense to maximize it.

However, the dependent care program only allows a person to receive funds that are already in their FSA account, regardless of how much the person has paid in dependent care expenses. For example, if a person chooses to withdraw the maximum of $ 5,000 over the course of the year, after 3 months there is only $ 1,250 in the account. Although the person has already paid more than that to the child care provider, they can only receive the balance.

However, with the Flexible Medical Spending Account, a person can reimbursed at any time during the year up to the annual amount chosen to withdraw. Therefore, the person can receive funds from the FSA before the funds have been withdrawn from their paycheck.

Let’s say you know that you are going to have a surgical procedure in January and your cost will be approximately $ 5,000, so you choose to have $ 5,000 deducted from the medical FSA during the open enrollment period. In February, you pay your share of $ 5,000. Even if you only have about $ 800 + in your FSA account, you can file a claim for reimbursement for the total of $ 5,000 you paid.

It is wise to review what your expected medical expenses may be in the coming year, verify that they are FSA eligible expenses with your employer’s FSA administrator, and then make the choice. It doesn’t hurt to underestimate, so you may have to pay for some expenses with after-tax dollars, but that’s much better than giving away money because you overestimated and lost what you had deducted and not used.

Some examples of using a medical FSA are when you incur orthodontic expenses and dental procedures for which you have a high deductible and / or copay. Regular copays for doctor’s office visits, which are generally not exceptionally expensive, are eligible for FSA reimbursement. If you go often enough, even saving a few tax dollars can be beneficial.

Using the FSA is a great tool for enforcing a disciplined savings program to cover expenses that are expected to be incurred anyway during the year. And by doing so through a tax-deferred program at work, you are ultimately reducing the cost by your marginal rate of income tax so that your savings are spread out to buy more services from you. (For someone in the 20% marginal tax bracket, for example, one would have to earn $ 1.25 to have enough cash to pay $ 1.00 for after-tax services.)

By taking the time to project your personal expenses, you can ultimately benefit from Uncle Sam’s help.

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