Is a Medical Flexible Spending Plan right for you?

Many employers have recently added medical flexible spending plans as a benefit. A medical FSA allows an employee to deposit earnings directly into a FSA account without having to pay taxes on that money. The employee fills out a claim form or uses a special debit card in order to access the FSA account for qualified medical related expenses. If you have a lot of medical expenses each year, you can save quite a bit of money. For example if you have deposited and used your FSA account for $2,400 worth of qualified medical expenses you would save $800 assuming a tax rate of 33%.

Based on these type of savings it would seem logical to put some money aside to fund your FSA account each year. However there are a couple of drawbacks to FSA accounts that are not ADD friendly. In many cases you will need to fill out a claim form in order to be reimbursed for expenses. The others major drawback is that if you do not spend the money that you put into the account each year, your employer gets to keep the remaining money in the account. It is possible to lose money on a medical FSA account if you overestimate your medical expenses and forget to file claims.

If you have regular medical expenses, it is probably a good idea to put some money aside in an FSA account. However if you do not have regular medical expenses and you are likely to forget to file claims, funding an FSA account may not be a good decision for you.

   

Comments

[mbhunter]

Depending on your tax rate it's possible that you could still come out ahead even without spending everything, because the full amount of the withholding comes off of your income.

Also, our FSA plan accepts OTC stuff, so though it's not the best use of the money stocking up on aspirin, cold medicine, etc., is better than forfeiting a few hundred dollars. We just needed to keep receipts and file for reimbursement.

[mbhunter]

Actually, I was mistaken. The forfeited amount would be taxable.