by Kevin Hagen

Created on: December 06, 2008

A health flexible spending account (FSA) is a way for you to set aside money to pay for out-of-pocket medical and dental bills not covered by your insurance. The advantage of putting your money in a flexible spending account instead of just paying the bills directly is the tax savings the account provides. The money you put into an FSA is not subject to social security, Medicare, or federal income tax. For example, if your effective income tax rate is 15%, you could save 22.65% of the amount you spend on medical and dental bills when you pay them through the FSA (7.65% for social security and Medicare taxes plus 15% for federal income tax).

When you sign up for a health care FSA at work, you agree to have voluntary deductions taken from your paycheck to fund your account. The amount you want to have deducted and contributed to the FSA is determined at the beginning of each plan year. The biggest potential drawback to an FSA is the "use it or lose it" aspect. You are not allowed to carry over the balance in your account from one year to another, and you cannot get a refund for the unused balance. Any remaining balance is forfeited. So in order to get the most from your flexible spending account, you should try to estimate as closely as possible the amount you will need during the year to pay for medical and dental expenses not covered by your insurance.

You could use your flexible spending account to cover co-payments and insurance deductibles, and to pay for any medical expenses that would generally be deductible as an itemized deduction and that are not covered by your insurance, such as dental care, eyeglasses, hearing aids, flu shots, laser eye surgery, chiropractor fees, and alternative medical treatments. You can also use your flexible spending account to pay for over-the-counter medications.

A flexible spending account can be particularly beneficial when you can reasonably estimate your medical expenses for the upcoming year. If you have a family, with regular medical check-ups, dental visits, regular ongoing health care needs or prescription medications, you may be able to more closely determine how much you should put into your FSA, and avoid the risk of losing any remaining balance at the end of the year.

You will normally need to submit your receipts and documentation of your expenses to the FSA plan administrator. So it is important for you to keep all your records. But many companies offer debit cards as an alternative. Rather than filing a claim for reimbursement from your account you just use the debit card and the expense is charged directly against your flexible spending account.

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