Flexible Spending Account (FSA): How Does It Work?

Did you know that you can deduct your medical expenses on your taxes (if you itemize)? However, your expenses need to be over 7.5% of your adjusted gross income, and you can only deduct those expenses over the 7.5% threshold. For many families, that 7.5% threshold is many thousands of dollars, so they are unable to deduct any of their expenses.

However, there is a plan offered by many employers called a Flexible Spending Account (FSA) that lets you use pretax dollars to pay for medical expenses. By using pretax dollars, you’re automatically saving the money you would have paid in taxes.

So How Does a Flexible Spending Account (FSA) Work?

Each year, you need to estimate your expected medical expenses for the year and elect an amount to put into your FSA account. The catch is that you need to use the money during that year or you will lose it. So, you need to balance not having enough money to cover all your medical expenses vs. having too much and losing it at the end of the year. You can make your election once per year during annual enrollment, which usually happens near the end of the year (varies by company).

Some future expenses are easy to calculate. For example, you may know that both your kids will need to get their annual physical, and the copay is $15 for each. Plus, you may know that you need contacts each year, and they cost $250 a year. Add that up, and you know you’ll have at least $280 in medical expenses for the year. And that $280 can save you $42 if you’re in the 15% tax bracket (and even more for higher tax brackets).

You can use your FSA account for a wide variety of items such as over the counter medications, doctor copays, glasses/contacts, etc. Click here for a list of eligible expenses. If you look at your drugstore receipts, you will be able to see which items you purchased are eligible for your flexible spending account.

We elect money every year for our FSA, and it came in handy today. My 2 year old was crying and acting very unlike himself in our mom & tot class. I was trying to figure out what was wrong, and finally noticed that he was holding him arm funny and wasn’t using it at all. I thought perhaps he had injured it when he threw himself on the floor before class (a wonderful 2 year old tantrum). By having the FSA, I was able to save money on the $50 copay at Urgent Care.

By the way, he is fine. They think he might have popped his elbow out, but the x-ray technician probably popped it back when she took x-rays. By the time the doctor came to see us, he was fine and using him arm again with no signs of it hurting. Figures…but at least I saved my tax money on the copay (and I’m thankful he’s OK) .