The health care system is a topic of discussion for many people. It seems like no one is happy with the way things are working now. Medical costs continue to skyrocket while wages struggle to keep up. Most of the time the percentage of increase of medical care far exceeds the increase in the money an average worker makes. That means you must take steps to ensure your family is protected. A flexible spending account may be just the ticket. Following are a few tips on how a flexible spending account works.
What Is a Flexible Spending Account?
Basically a flexible spending account is a special account you can use to pay for medical and dental bills, and some dependent care services. An account is set up by your employer whereby money is automatically withheld from your paycheck and deposited into a managed account. The money is put into your account before taxes are deducted. There are no maintenance fees, and you won’t be charged a fee if you’re forced to, or choose to, use the account.
Advantages
The obvious advantages are that you won’t have to pay taxes on the money that goes into your account, and there will be funds available in the event you have unexpected medical bills. You have total control on how the money is spent, as long as it goes for medically related purposes. Unlike a health savings account, flexible spending accounts don’t require you to carry a high deductible insurance policy. FSA’s can also be used for a wide range of medical procedures not generally covered, such as LASIK or cosmetic surgery.
Disadvantages
A Flexible Spending Account has one major drawback. Because it can be used to cover any number of medical expenses you are required to use up all the money in the account each year. As a result you need to be extremely careful in determining exactly how much money to put into the account, because at the end of the account period you lose that money–whatever is left in the account is no longer your money. You also can’t increase the amount you want to put into a flexible spending account until that account period is ended. Once your decision is made you’re stuck with it until that time period is ended.
What You Can Use the Money For
The only real qualification for using the money in your flexible spending account is that it must be medical in nature–unless you designate the account for such purposes as care for a dependent. An FSA can also be used to cover a deductible from your health insurance policy, or co-pays for medical expenses. Account holders can use an FSA debit card to pay for virtually anything they choose, as long as it is medically related. The IRS and the FSA management company have the right to request a copy of any receipt for anything you use the FSA card for, whether it was used to pay for a service or a product. If they determine the expenditure wasn’t warranted you may be required to pay the money back into the account.
How Much Do You Put in a FSA?
The hardest part of having a flexible spending account is determining how much money to put into the account. Too much and you will lose whatever’s left. Too little and you may end up with a lot of out-of-pocket expense. One nice thing about a FSA is that you and you alone decide how much of your money goes into the account. Usually a middle-aged family man will need more for medical expenses throughout the year, so they would naturally put in more than a young, relatively healthy single man. Because the fund manager is entitled to use the leftover money as they see fit, you need to be extremely careful with the amount of money you designate for a flexible spending account.
Guest post from Bailey Harris. Bailey writes for www.businessinsurance.org.
Bailey Harris is a freelance writer. She enjoys writing about insurance, finance, business, home, health, and more.
