Friday, February 02, 2007

Using an FSA or HSA

Here is my contribution to Frugal Friday for this week. For those who are unaware, FSA stands for "flexible spending account". JM and I are just starting to figure out how this works, but we can already see how it will save us a good deal of money. In most larger companies there is an option along with the company health insurance program to contribute money to a FSA. At the beginning of the year, or whenever there is a "life event" (such as you get married or have a baby), you designate a certain amount of money that comes out of your paycheck each week, tax-free, and is set aside to be used for all the medical expenses that your insurance doesn't cover. Here is how it works:

Let's say you go to your doctor's office. You pay for parking, your copay, and you have to pay for your medicine. That is out of pocket money. KEEP YOUR RECEIPTS!!! You will then need to submit your claims to your FSA provider, who will then reimburse you from the money in your FSA account. You usually have several months to get this done. For example, our plan states that all claims must be made by December 31 of that year, but they give you a grace period. End-of-year expenses must be filed by April 30th of the following year. So you send them your claim, and they send you a check. You're replacing taxed money with tax-free money. Big deal, right?

Let's say that you put $200 into your account. You and your husband both go to the dentist twice that year, each time with a copay of $10. That totals $40. One of you has to have a cavity filled, which costs about $100. One of you goes to the doctor and has to get a prescription filled. Another $30. Someone has to go visit a specialist, which costs $30. That adds up to the $200 in your account. If you assume a tax rate of 25%, you would ordinarily pay $50 in taxes on that $200. So by using tax-free money for the medical expenses (and if I'm doing the math correctly), you've just saved yourself $50 for the year.

Now expand that: children's doctor visits, eye exams, glasses, contacts, hospital visits, over-the-counter drugs (like cold medicine, allergy medicine, pain relievers, antacids, etc), hearing aids/batteries... In my plan, even expenses like pregnancy tests, flu shots, and parking fees for the doctor's/hospital's parking lot are covered! If your family spends $500 on medical expenses a year you could save about $125 like this. If you spend $1000 you could save $250.

The only downside is that you *have* to use the money, or it's just wasted money. Our plan (and maybe others?) allows us until March 15 of the following year to use up the extra money, but if it's not used by then it's a loss. However, consider that if in our example you had spent $150 instead of the full $200, you still would have broken even for the year, since $150 in taxed money is equal to $200 of tax-free money (assuming the tax rate is 25%).

Now, I realize that many people have no FSA readily available for them. Many people have to buy their own health insurance. If you are one of these people, there is another option that may be available to you: the Health Savings Account. I honestly don't know much about these, since they don't apply to us, but the general idea I have is that they can actually earn interest like a normal savings account, and that the money in them is tax-free. The limit to how much you can put in each year is in the thousands of dollars, I believe. And unlike an FSA you DON'T lose the money if you don't use it by the end of the year. So if you buy your own health insurance please be sure to look into this option! It could save your family a LOT of money.

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  • Anonymous

    It's amazing to me how many people (especially single or young couples) fail to take advantage of this benefit. They're basically walking away from free money.


  • Tammy L

    Thanks for taking the time to share all this information!

    By the way, I really enjoy your blog. Great posts! Thanks!