Is a Healthcare Flexible Spending Account a Good Idea?
A Healthcare Flexible Spending Account (FSA) is an employer-provided benefit that allows you to contribute pre-tax dollars to pay for eligible medical, dental, and vision care expenses that your insurance plan may not cover. As with any financial decision, it is important to know the facts about Healthcare FSAs to help you determine if you should take advantage of this type of arrangement. In this space, we share basic information regarding these arrangements including enrollment considerations and avoidable provisions to assist you in making a well-informed decision.
What is a Healthcare FSA?
Similar to other pre-tax benefits like your 401(k) contributions or commuter benefits program, many employee benefit providers allow you to elect a specified pre-tax dollar amount (up to $2,700 in 2019) from your paycheck to be contributed to your Healthcare Flexible Spending Account (FSA). The amount contributed is not subject to income tax, giving you a larger take-home paycheck.
Does Enrolling Make Sense For Me?
The key to knowing whether and how much to contribute depends on anticipated healthcare expenses, not otherwise covered by your insurance plan, for you and your dependents. With a Healthcare FSA, you must decide on the amount to contribute at the beginning of the plan year. While this tends to deter employees from participating, estimating your upcoming eligible expenses can help you determine how much to contribute. Do you or your dependents make routine doctor visits once a month, once a quarter, or once a year? Do you pay for a monthly prescription? Do you anticipate dental work this year? Your benefits provider may also have online tools like a calculator that can help you estimate your annual out-of-pocket expenses.
The (Avoidable) Use-It-Or-Lose-it Provision
While many shy away from enrolling in a Healthcare FSA in fear of the notorious “use-it-or-lose-it provision,” it’s important to note that there are ways to avoid it, depending on the type of Healthcare FSA your employer offers. In general, you must use all of your Healthcare FSA funds in the year of your contribution or you risk forfeiting them. However, if your employer offers a Healthcare FSA with carryover, for example, you can rollover up to $500 in your account from one year to the next. Or if you have a Healthcare FSA with a grace period, you typically have up to two and a half months after your plan year ends during which you can continue to spend down the balance on qualified healthcare costs.
Keep in mind if you leave your job during the year, the unspent account balance stays with your employer. Healthcare FSAs are not portable, meaning you cannot transfer your balance to another employer, but you may elect COBRA to continue using your account through the end of the year.
Healthcare FSA contributions are conveniently deducted from your paycheck and contributed to your FSA account so you don’t have to worry about making the contributions yourself. Your benefits provider may also offer a debit card linked to your FSA account that can make pharmacy stops and office visits hassle-free.
I want to enroll! What’s next?
Visit your employee benefits information to see if your employer offers a Healthcare FSA. Note that you may be subject to specific open enrollment periods during the year. We’d be happy to help explore your options. Let us know if we can review your benefits information and help determine your estimated annual expenses.