In February 2015, my wife gave birth to our first child. But instead of paying the huge bill out of pocket, our checking account balance dropped by only a few hundred dollars. The rest was covered by the flexible spending account (FSA) I contributed to monthly.
Not only did we avoid draining our bank account, but the money I contributed to the FSA was made pre-tax, giving us hundreds of dollars in tax savings every year.
If you have consistent health care needs or a big health care event coming up, find out why you should consider setting up an FSA today.
What is a flexible spending account?
Sixty-five percent of employers offer FSAs, according to the Society for Human Resource Management. Designed to help you pay the cost of health care, an FSA covers a wide range of eligible medical expenses (more on those expenses later).
There are some ineligible expenses, though, so make sure you double-check before trying to use your funds.
How flexible spending accounts work
You can set up an FSA during your employer’s open enrollment period for the next year and determine how much you want in the account up to that year’s limit. In 2018, you’ll be able to contribute up to $2,650 for the year.
On Jan. 1 the following year, you’ll get the full amount in your FSA to spend on eligible expenses. Then, your employer will deduct the amount from your paychecks throughout the year before taxes.
For example, if you want $2,400 in your FSA, your employer will deduct the following from each paycheck, depending on how often you get paid:
- $200 if you’re paid monthly
- $100 if you’re paid semimonthly
- $92.31 if you’re paid biweekly
- $46.15 if you’re paid weekly
The benefit you get comes directly from the tax savings. For example, if you contribute $2,400 throughout the year and have an effective tax rate of 20 percent, you’ll save $480 in taxes that year.
$2,400 x 20 percent = $480
And if you’re lucky, your employer also will contribute to your FSA, giving you even more savings. For instance, my employer at the time my son was born matched 100 percent of my contributions up to $1,000.
I set my FSA amount at $2,500, so I contributed $1,500 throughout the year, and my employer contributed the other $1,000.
How to use your flexible spending account funds
You’ll typically get a debit card in the mail that’s tied to your FSA, making it easy to use your FSA money. That said, you also can pay for the medical costs out of pocket and submit a request for reimbursement.
To get the reimbursement, you’ll usually scan and upload or fax a copy of your receipt that shows the date of the service or purchase, a description of the service or product, and the cost.
Additionally, you might get a request to substantiate certain debit card purchases to make sure they’re eligible. The same process applies as if you were requesting a reimbursement.
Qualified health care expenses
Some of the eligible costs you can cover with your FSA money include:
- Doctor visit copays
- Doctor and specialist procedures
- Dental exams and procedures
- Vision exams, glasses, and contacts
- Prescription medicines
- Some over-the-counter medicines
- Physical therapy
- Psychiatric care
- Hospital stays and services
You can find a complete list of eligible expenses on the Internal Revenue Service (IRS) website.
Use it or lose it
The main drawback to FSAs is the fact that you have to use the account balance by the end of the year. Otherwise, you lose it.
To mitigate this problem, employers can (but are not required to) offer one of two options:
- You can carry over up to $500 to the following year.
- You can have a grace period of up to two and a half months after the year is over to count medical expenses toward the previous year.
If you’re coming up on the end of the year and are afraid you’ll lose your FSA funds, consider prepaying for a service you regularly use, such as chiropractic adjustments or physical therapy. You also can check out the FSA Store, where you can find thousands of FSA-approved products.
You can’t take it with you
If you quit your job or are terminated, the FSA funds don’t follow you to your new employer. That said, if you end up using all the funds before the end of the year and are terminated or quit, you don’t have to pay back the remainder in most cases.
That’s what happened to me in 2015. I received $2,500 in my FSA in January, my son was born in February, and I drained the account to pay the hospital bill. Then, I left the company in March without needing to make any more contributions to the FSA.
Some FSA plans might require that your remaining contributions be taken from your final paycheck, however, so be sure to check with your employer.
Flexible spending account vs. health savings account
Another option to consider as you look for ways to save on health care costs is a health savings account (HSA). An HSA functions like a normal savings or investment account. You can contribute to it regularly or not at all.
Unlike an FSA, an HSA comes with the following benefits:
- You can take it with you wherever you go.
- You’re not required to use your funds within a set time frame.
- You can invest your HSA funds to compound your savings once you have at least $2,000.
- You can use it to save for health care costs in retirement.
- In 2018, you can contribute up to $3,450 if you’re single or up to $6,900 if you have a family.
Some employers also make contributions to HSA accounts as a benefit.
That said, not everyone can contribute to an HSA. To qualify, you have to have a high-deductible health plan (HDHP), which means your health insurance must have a deductible of at least $1,350 on a self-only plan or $2,700 on a family plan.
You also can’t open an HSA if someone else can claim you as a dependent on their tax return or if you’re covered under a secondary health insurance plan that doesn’t meet the HDHP minimums.
Is a flexible spending account right for you?
You can’t have both an FSA and an HSA, but you should seriously consider getting one or the other if you qualify.
The FSA is particularly helpful if you don’t qualify for an HSA, but you need to make sure you use the funds each year. So, if you don’t visit the doctor often, it might not be worth it.
If you do qualify for an HSA, though, you’ll be better off knowing you can take your money wherever you go and that there’s no risk of forfeiture. The investment element of an HSA can be risky, but it also can offer tax-free returns. Plus, you don’t have to invest your money if you don’t want to.
Whichever option you choose, do the research to see which one is better for your situation. If you qualify, either an FSA or HSA can help you better manage both short- and long-term health costs.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
|Lender||Variable APR||Eligible Degrees|
|Check out the testimonials and our in-depth reviews!
1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 7.89% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.97% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at firstname.lastname@example.org, or call 888-601-2801 for more information on ourstudent loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
APR stands for “Annual Percentage Rate.” Rates listed include a 0.25% EFT discount, for automatic payments made from a checking or savings account. Interest rates as of 11/8/2018. Rates subject to change.
Variable rate options consist of a range from 3.27% per year to 6.09% per year for a 5-year term, 4.64% per year to 6.14% per year for a 7-year term, 4.69% per year to 6.19% per year for a 10-year term, 4.94% per year to 6.44% per year for a 15-year term, or 5.19% per year to 6.69% per year for a 20-year term, with no origination fees. APR is subject to increase after consummation. The variable interest rate will change on the first day of every month (“Change Date”) if the Current Index changes. The variable interest rates are based on a Current Index, which is the 1-month London Interbank Offered Rate (LIBOR) (currency in US dollars), as published on The Wall Street Journal’s website. The variable interest rates and Annual Percentage Rate (APR) will increase or decrease when the 1-month LIBOR index changes. The variable interest rates are calculated by adding a margin ranging from 0.98% to 3.80% for the 5-year term loan, 2.35% to 3.85% for the 7-year term loan, 2.40% to 3.90% for the 10-year term loan, 2.65% to 4.15% for the 15-year term loan, and 2.90% to 4.40% for the 20-year term loan, respectively, to the 1-month LIBOR index published on the 25th day of each month immediately preceding each “Change Date,” as defined above, rounded to two decimal places, with no origination fees. If the 25th day of the month is not a business day or is a US federal holiday, the reference date will be the most recent date preceding the 25th day of the month that is a business day. The monthly payment for a sample $10,000 loan at a range of 3.27% per year to 6.09% per year for a 5-year term would be from $180.89 to $193.75. The monthly payment for a sample $10,000 loan at a range of 4.64% per year to 6.14% per year for a 7-year term would be from $139.65 to $146.76. The monthly payment for a sample $10,000 loan at a range of 4.69% per year to 6.19% per year for a 10-year term would be from $104.56 to $111.98. The monthly payment for a sample $10,000 loan at a range of 4.94% per year to 6.44% per year for a 15-year term would be from $78.77 to $86.78. The monthly payment for a sample $10,000 loan at a range of 5.19% per year to 6.69% per year for a 20-year term would be from $67.05 to $75.68.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown.
All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.28% effective October 10, 2018.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.47% – 6.99%3||Undergrad & Graduate|
|2.46% – 6.97%1||Undergrad & Graduate|
|2.57% – 8.44%4||Undergrad & Graduate|
|3.02% – 6.44%2||Undergrad & Graduate|
|2.50% – 7.24%5||Undergrad & Graduate|
|2.79% – 8.39%6||Undergrad & Graduate|