Hidden Savings? The Flexible Savings Account

I was shocked today to find out that none of the managers that I work with are taking advantage of the Flexible Savings Arrangement (or Account) that my company offers. I suppose I shouldn't be shocked - it is hardly advertised to our employees and never discussed in the workplace. I wonder who else isn't familiar with Flexible Spending Accounts.

The Medical Expense FSA is one more resource to save considerably on annual expenses by setting aside pre-tax dollars for basic medical purchases. The FSA can be used to pay for any medical expenses except insurance premiums, cosmetic items, cosmetic surgery, or items to improve "general health." The medical expenses covered by the FSA include co-payments, co-insurance, and deductibles, plus dental and vision expenses and over-the-counter drugs. A better list of allowed expenses is available at FlexibleSpendingAccountsOnline.com.

The method for filing claims depends on the company holding the FSA. In the case of our company, they offer an FSA Debit Card for a $20 annual fee, or we can file via fax for free. Once the claim is faxed, with the appropriate documentation or receipt, the funds are deposited to my bank account within 24-48 hours.

To further promote the Flexible Savings Account, lets look at the numbers:

Assumptions:
- 25% tax bracket for taxable income of $31,850-$77,100 (Single)

- We'll use $70,000 taxable income

- $2000 in annual medical expenses

Without the FSA:

Taxes on $70,000 are calculated as $4,386.25+25% of the amount over $31,850. For our $70,000 this means $13,923.75 in taxes, with $56,076.25 in after-tax earnings. After your $2000 in medical expenses, you have $54,076.25.

With the FSA:

Your taxable income is $68,000, meaning $13,423.75 in taxes, with $54,576.25 in after-tax earnings. After your $2000 in medical expenses, you still have $54,576.25.

The Comparison:

Using the FSA for $2000 in medical expenses saves you $500.00.

So if it saves so much money, why not use it?

As with anything, there are a few drawbacks. First, you have to file the claims. This requires a few extra minutes to save your receipts, prepare the fax cover-sheet, and dial the fax number. Second, the FSA is a use it or lose it account. Whatever you don't spend during the year, you forfeit.

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