Flexible Spending Accounts vs Health Spending Accounts (Part Two)

“The first wealth is health.” ~Ralph Waldo Emerson

As mentioned in the previous article, there are many different requirements for a person to meet in order to qualify for a Health Spending Account.  One alternative to the Health Savings Account is a Flex Spending Account.  Below is the definition for this type of account:

Flexible Spending Account: one of a number of tax-advantaged financial accounts that can be set up through a cafeteria plan of an employer in the United States. An FSA allows an employee to set aside a portion of his or her earnings to pay for qualified expenses as established in the cafeteria plan, most commonly for medical expenses but often for dependent care or other expenses. (Citation)

Flexible Spending Account (FSA): is a tax-favored program offered by employers that allows their employees to pay for eligible out-of-pocket health care and dependent care expenses with pre-tax dollars. By using pre-tax dollars to pay for eligible health care and dependent care expenses, an FSA gives you an immediate discount on these expenses that equals the taxes you would otherwise pay on that money.  (Citation)

Unlike a Health Spending Account (HSA), the FSA can be used with most health insurance plans provided by the employer.  Typically the employer offers this plan in conjunction with their current health plans and allows the employee to pay for medical expenses not covered by insurance.  Some examples of these types of expenses are listed below:

• Dental
• Vision
• Over-the-Counter Drugs
• First Aid Kits

For a general list of the different expenses that can be covered by an FSA can be found in the Publication 502 citing medical expenses recognized by the government.

Typically, users of an FSA incur the medical expense and then submit documentation to their FSA provider to receive reimbursement for the expense.  However, some providers are beginning to provide FSA debit cards that can be used withdraw FSA funds immediately for a qualifying expense, rather than waiting for reimbursement.

Although it is mostly dependent on the plan on the exact stipulations on whether there is a maximum or minimum that can be contributed to the FSA, the government requires a maximum dollar amount or a maximum percentage of the salary to be specified in the terms of the account.  (Citation)  This is due to the fact that the government allows contribution of pre-tax dollars to the account overall reducing the employees gross income and tax burden.

To assist with calculating how much this provides a benefit to the employee who takes advantage of this plan, refer to the previous article about maximizing deductions.

To provide a complete review of this type of account, one must take in account the negative aspect of a Flexible Spending Account.  FSAs require special planning due to the fact that they are a "use it or lose it account".  What this means is that the if account holder does not use all the funds that are in the account by the end of the coverage period, the money is returned to the employer and the employee loses that contribution.  

The coverage period is typically the calendar year (starting on January 1st and ending on December 31).  However, the government allows for a 2.5 month grace period after the calendar year to further incur anymore expenses that can be used to deduct from the remaining balance on the FSA.

Overall, this account is a good idea for someone who does not qualify for an HSA but still has medical expenses not covered by their employer's health insurance plan.  As long as the employee conservatively plans for their medical expenses, this account will be beneficial in allowing the employee to pay for their expenses as well as provide a tax break.  Please leave your comments below in your thoughts about HSAs, FSAs, or any other savings plans you may know about.

Stay Disciplined!