Now more than ever, it pays to spend less

FSA can save money on things you know you are going to buy.

FSA can save money on things you know you are going to buy.

     If you're like me, you like savings. There is a certain satisfaction that comes from finding that item for less than its full price.  After all, why would you turn down the opportunity to purchase something for full price when you know you can purchase it for less?  Yet, some people do just that when they choose not to participate in their flexible spending account (FSA) offered through their employer.

     From my experience there are three excuses for non-participation.  1)  They didn't know about it.  2)  They never got around to enrolling. 3)  They were worried about the "use it or lose it" provision.  

The first may be excusable though you probably should take some responsibility for finding out the benefits provided through your workplace. The second is not excusable at all, but the third excuse has some merit, but not as much as it once had.  

Recently, the Treasury Department announced it is relaxing the "use it or lose it" rule, so that one would be allowed to carryover up to $500 to the next year.  If your employer offers a FSA, now more than ever, you should consider taking advantage of an under utilized benefit.  

What does a FSA do?

     There are a couple of types of FSAs.  A Health Care FSA and a Dependent Care FSA.  For our purposes in this post, we are speaking about the healthcare FSA. The Dependent Care FSA can also be advantageous from a tax persepctive, but because there are federal child tax credits involved,  individual circumstances dictate whether you should utilize it or not.  

     The Health Care FSA allows an employee to reduce taxable income while funding an account used to pay for expenses not usually covered by a health insurance plan.  The employee chooses an amount (up to $2,500 in 2014) to apply to their account.  They fund the account throughout the year in equal payments by having it cut from their paycheck.  The amount they choose to fund the account is taken out before taxes (reducing their taxable income) and when the used  for qualified purchases, they are reimbursed that amount tax free.  That means you are essentially getting a discount the size of your tax bracket!  Because these are purchases you would make anyhow, failing to enroll in the FSA means you pay full price when you could be paying substantially less!  

"Use it or Lose it"

    The problem for many folks was the provision that required one to forfeit any remaining account balance that was unused by the end of the year.  No one wants to lose money and since you don't know what your health expenses will be in advance, people would often just not participate.  It is true that you needed to be conservative when estimating how much you would contribute, but with the new announcement, you can err on your estimate by up to $500 and not risk forfeiture. The new announcement means you would simply carry forward the unused amount for the following year.  This should encourage you to go ahead and claim your tax savings by enrolling at your next available enrollment period.  

     While you don't know what may happen, there are some qualified expenses that you can estimate will a high degree of confidence.  For instance, I have a little acid reflux.  I use an over the counter medication to help with the condition.  I spoke with my doctor, and he agreed to that the over the counter dosage was sufficient for my needs.  He wrote me a prescription for it.  I know how much I'll take each year and simply calculate my cost for the medication and apply that to our FSA.  

    Co-pays, deductibles, eye glasses/ contacts, dental work are some of things that qualify for tax free reimbursement.  Those types of expense are easily predictable and lessen the risk for forfeiture.  Remember these are expenses you are going to incur throughout the year anyway.  You are simply deciding if you want to get a discount on those purchases are if you want to pay full price.  

    You may have missed your enrollment period, but all it not lost.  Simply track the medical expenses you incur from now until you next enrollment date.  That will help you decide how much you want to apply when you do enroll.  One final note, in order for your plan to allow the carry forward of unused balance, your employer needs to amend their plan.  Hopefully they have, but if not, make a call to your human resources people and find out if they intend to do so. Even if they don't, you can still save some money, just be a little more conservative in your estimates.  

It's your money, make it work for you in 2014!