Putting Money In
When you get a new job or have open enrollment at your current job, some employers offer the opportunity to select a Flexible Spending Account (or FSA) as part of an employee benefits package. An FSA can stand on its own or be combined with a regular health insurance plan. According to an article published by the Bureau of Labor Statistics in October 2003, the employer chooses a limit of how much each employee can contribute annually to his own FSA. The employee can choose to contribute less than the maximum amount designated by the employer. Once an employee selects an amount, that amount is divided the number of paychecks in a year. The resulting dollar figure is how much an employee contributes per pay period.
Qualified Expenses
An FSA can only be used to cover a qualified medical expense, which is defined in great detail by the Internal Revenue Service in Code Section 213. You, your spouse and your dependents are able to use a FSA to cover prescription drugs, teeth cleanings, critical operations and any other expenses related to medical care. An FSA can even reimburse you for over-the-counter products like flu remedies and cleaning solution for contact lenses. If you have an FSA in addition to a health insurance plan, you can use the FSA to cover copayments.
Taking Money Out
In the past, FSA holders did not have immediate access to the funds. The account holder, or the health care provider, was required to mail in claim forms and receipts to the company managing the FSA. If the management company determined the expense was a qualified one, the money would be disbursed accordingly. Now, FSA management companies are giving account holders the ability to make their own decisions about qualified expenses by allowing account holders to use FSA debit cards. If you choose to use this debit card, the FSA management company and the IRS retain the right to request a copy of the receipt for the service or product in order to evaluate whether the expense was truly qualified.
Pros and Cons
There are two major reasons why people enroll in the FSA offered by their employer. The first is that the account is tax-free; the second is that an FSA allows an employee to decide how much money he needs for health insurance. If you are single and do not visit the doctor often, you can choose to put less in an FSA than someone with three children and a chronic medical condition. The cost can be tailored to meet your individual needs.
There is a downside to an FSA: the money unused in your FSA account at the end of the year disappears. According to the Employee Benefit Research Institute, the plan sponsor receives that extra money and can use it any way that it sees fit, provided that it does not give the money back to the employee. Furthermore, the money cannot be rolled over into an FSA for the next year. Overestimating your expenses can result in forfeiting the money you contributed to the plan; underestimating can leave you paying out of pocket for medical expenses. Essentially, FSA users must be good estimators.
Tags: health insurance, account holders, Flexible Spending, health insurance plan, insurance plan, less than