It is insurance time soon. We have the option of a flexible spending account.
I wear glasses, and need new ones every year or so.
I take 2 thyroid meds because mine was removed. I have to take them. I take a couple of others as well.
I do not understand the FSA, and am not sure if I need one. I have about $100 USD in meds co-pays a month, and $25 co-pays for at least 8 doctor visits a year for blood work for the thyroid stuff.
My coworkers are better at adulting, and I do not want to ask around at work…
So do I need one, and how does it work? Thanks in advance.
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You have two kinds of money: a) money your employer gives you; and b) money you have paid federal income tax on.
Alas, the tax rate can be pretty high, so $100 of (a) might only equal $70 of (b). The concept of an FSA is using (a) money to pay for healthcare. Since the medical provided doesn’t care if it’s getting (a) or (b) your salary goes farther if you spend (a) money.
So, you tell your employer to put (a) into an FSA, instead of paying it to you. Then you tell the FSA to give that (a) money to the doctor, paying their bill. If you get to the end of the year, you have to pay a tax/penalty to get that (a) money turned into cash, which is (b) money.
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If you sign up for an FSA, you reduce your salary by an amount and get it available as FSA funds instead. You can spend funds from the FSA to pay for medical care, either directly or reimbursed. The benefit is that the FSA funds are free from federal income and payroll taxes (state taxes may differ), unlike your salary. You lose the funds you don’t spend, so it’s important not to overestimate the contribution amount, but you regularly have some predictable medical expenses so you are in an ideal position to make use of it for that.
Disclosure: I have an HSA, which is similar but not exactly the same as an FSA. One crucial difference, I believe, is you *have* to spend the money in an FSA that year (with some very limited exceptions). An HSA also usually requires a high-deductible insurance plan, which I won’t get into here unless you ask.
The idea of both is the same. The government says “If you spend your money on these specific things (generally healthcare), you don’t have to pay taxes on that money.” This usually saves you a bit of money.
It’s easiest to understand after putting numbers to it. Here’s some super simplified ones.
Let’s say you make $10,000 in a year, and you get taxed at 10%. Normally, this means you pay $1,000 in taxes, leaving you $9,000 to spend. Suppose your healthcare costs are $1,000. You now spend $1,000 on taxes, $1,000 on health care, and have $8,000 to spend anyway you want.
If you have an HSA/FSA, you can instead deposit that $1,000 you spend on healthcare into that account. Once you do that, the government says “Okay, you don’t need to pay taxes on that money, only the other $9,000”. So now you pay $900 in taxes, still spend $1,000 on health care (from your FSA), and have $8,100 to spend anyway you want. So, by using the FSA, you essentially saved $100 you would have otherwise paid in taxes. The tradeoff is that, once the money is in your HSA/FSA, you are now restricted on what you can spend it on (namely, healthcare expenses). The idea is that, usually, you would have spent that money on healthcare anyway, so it’s a net benefit.
Unfortunately, it can be very difficult to figure out if, in your exact situation, you would end up with more money taking the FSA or not. There’s just too many factors, including what the rest of your insurance plan looks like (deductible, premiums, copay, coinsurance, in-network vs out of network, etc.)
In my case, it would have been really close either way, so I chose the HSA option for the following reason. With the traditional (non-HSA) plan, I pay the insurance company ~$100 every month no matter what (the premium). Then when I need care, I have a small deductible I need to spend out of pocket, then insurance helps pay for the rest. But insurance will only really help pay for things that are “in-network” and covered. For example, they might not consider couples counseling a valid expense they cover, so then I’m on my own for that despite paying them every month.
By contrast, with my HSA plan, I pay next to nothing in premiums, but I have a high deductible. This means I have to pay for a few thousand dollars of my care out of pocket before insurance starts to help out. However, I can spend that money from my HSA. So what I do is just deposit that ~$100 I would have paid on my premiums into my HSA, and use that to pay for health expenses. The nice thing about this is that the HSA can be spent on anything the government recognizes as healthcare, which is a *much* broader definition than my insurance company’s in-network / covered services. So I could pay for couple’s counseling from it and not need to negotiate with insurance at all (although in that case it may not count towards my deductible).
TL;DR an HSA/FSA gives you more flexibility on how you spend you healthcare money with the tradeoff of having slightly less predictable/consistent costs. In many (but not all) cases, this can save you money by letting you pay less tax.
It’s a medical savings account. It depends on what your job offers and their terms.
Jobs can allow 2 options, either an FSA or HSA. Main difference is an FSA resets each year, so if you are young and don’t have recurring medical bills, I wouldn’t set one up; an HSA keeps its balance each year, no resetting.
Both of them are tax-advantaged, you don’t pay income tax nor even FICA (not many deductions get around FICA tax, so this is great). You tell your job how much to take out of your paycheck/salary.
Some times you get a card or account numbers to use for a medical purchase, sometimes you just save your receipts and pay for it out of pocket and then you can transfer the money from the FSA/HSA to your personal checking to make you whole.
As others have said, the FSA money is deducted pre-tax so you have a small savings to apply towards medical related expenses. It is a “use it or lose it” plan, so only put in what you know you will spend. In your case, figure out what your annual costs are for your prescriptions and glasses, including doctor visits. Then sign up for that amount. You’ll typically receive a debit card to access those funds. And a nifty feature is that you have access to the full amount on day 1, even before you’ve actually contributed. But if you leave the company or the year ends before you’ve spent it all, it’s gone.
The ELI5 Version:
Ok, imagine every time you get paid $10, your boss first gives the US government $2 as your taxes and gives you $8. That $8 is called your “take home pay” and you can do whatever you want with it. Now the US government wants to let people save money on medical costs. So they allow your boss to put all $10 into a special spending account just for your health. As long as you use it for glasses, medication, and doctor visits you get all $10 instead of just $8. It’s a great deal. Health is expensive, so you are allowed to put up to $3050. But here is the catch, if you don’t lose it all, the money is given to your boss and they can do whatever they want with it.
Now for your specific case, you can ask your HR team if there is a rollover for the FSA plan. This is a common question and will make you look smart. A lot of companies have a rollover, which means up to $610 of funds go into the 2025 account for you. So you don’t lose everything left over.
If you have the option for an FSA it is a great deal. If you put in $1400 pre-tax for the expenses you know about, you are saving (tax bracket)*1400.
FSA is an excellent deal because you get to pay for any out-of-pocket expenses with pre-tax dollars. This is big big savings.
You have to make sure you have only the amount you think you’ll use over the year deducted. You lose anything you don’t use.
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