Flex Dollars: A Good Deal for Health Care

...but only if you use it
December 7, 2015 Updated: January 3, 2016

The busy holiday season may not be when scheduling health care appointments is high on your priority list. But if your insurance plan includes a flexible spending account, December is the prime time to pay this money some mind.  

A flexible spending account (FSA), is offered by some employers to cover costs that fall through the insurance cracks. Because even if you have decent health care coverage, chances are it still doesn’t meet all your needs.

FSAs handle deductibles, copays, and other out-of-pocket health care expenses that insurance leaves behind.

FSA funds come from the employee’s wages before taxes, although an employer may also contribute to the account. What makes paying into an FSA such a good deal is that it’s tax-free, which means the FSA portion of your paycheck is exempt from federal and state income taxes. According to the Congressional Research Service, people save about 23 percent in taxes by paying their otherwise out-of-pocket health care costs through an FSA.

Plans vary, but FSAs typically cover chiropractic and acupuncture, treatments (Jovanmandic/iStock)

An FSA is a good deal for employers too because it saves them from having to pay Social Security taxes on that portion of your income. The more employees that participate, the more the employer saves on payroll taxes.

The Internal Revenue Service allows you to put up to $2,550  into an FSA annually, but there’s a catch: The money must usually be spent by the end of the year.

Some employers may offer a grace period of up to 2 1/2 extra months to spend the money, while others allow up to $500 to be carried over into the next year.

This means that for most FSA plans, when December ends, the account zeroes out, regardless of how much money was still in the pot. In other words, a flex account is only a good deal if you spend the money.

What It Pays For

Plans vary, but FSAs typically cover things like prescription drugs and lab fees, eye exams and glasses, dental cleanings and X-rays, as well as crowns, fillings, and braces, massage therapy, chiropractic and acupuncture, fertility treatments, Lamaze classes, maternity care and midwife fees, child care and nursing home costs, arch supports and hearing aids, substance abuse treatments, birth control, breast pumps, health screenings, prosthesis, speech therapy, non-cosmetic surgery, psychiatric care, lab fees, doctor’s fees incurred outside the United States, and legal fees related to medical care.

Some plans may also cover weight-loss programs, and some nutritional supplements, but restrictions apply. (Toa55/iStock)

Some plans may also cover over-the-counter drugs, psychotherapy, hypnotherapy, liposuction, health club dues, diabetic supplies, genetic testing, guide dogs, lead-based paint removal, wheelchairs, walkers, and canes, weight-loss programs, and some nutritional supplements, but restrictions apply.

It’s important to know the scope of your particular FSA policy because it may cover things you’d never expect. For example, asthma and allergy sufferers may be able to pay for an air purifier or a hypoallergenic mattress through their FSA. Ask to see your company’s policy for more details.

Using your FSA card is easy. It works just like a credit card but is restricted to appropriate goods and services. However, you may need to save receipts to justify your purchases.

For most financial decisions, it’s prudent to save for a rainy day. But this logic doesn’t apply with flex accounts where the rule is either use it or lose it.

To make the most of your FSA money, simply spend it all by the end of the year. Otherwise, a tax free portion of your paycheck just goes down the drain.

Follow Conan on Twitter: @ConanMilner