At the beginning of each plan year, you need to do a little budgeting. You need to decide how much money you plan to send on qualifying expenses in the coming year. Based on this budgeting process, contributions are then made through payroll deduction into your FSA. These contributions are made on a tax free basis. As expenses are incurred, you request tax free reimbursements from your account.
Health care FSAs help budgeting in two ways!
1st Budgeting Advantage: Making contributions through payroll deduction is easy! If you choose to enroll, you will make deposits to your FSA each pay period through payroll deduction. It’s a lot easier to accumulate money if it is withheld from your paycheck before you see it. In this next year, let’s say you know you are going to continue to take medication for high blood pressure. In addition, you know your daughter will be seeing the doctor for her allergies and, oh yes, you really should get that tooth crowned before you lose it altogether. Sound familiar? These are things you are already going to spend money on. What if the total of these expenses was $520? Your FSA allows you to deposit money each pay period through payroll deduction so you will have enough money to pay for all these expenses. Budgeting $10 through payroll deduction each week is a lot easier than coming up with $520 all at once.
2nd Budgeting Advantage: Your entire annual health care FSA election can be withdrawn any time during the year regardless of year to date deposits. What? Say that again. Your entire annual health care FSA election can be withdrawn any time during the year regardless of year to date deposits. With any other bank account, you can only withdraw what you have deposited. A health care FSA is not a normal bank account. For the health care FSA, the IRS rules say your employer must make your entire annual election available for withdrawal any time during the year. This means if you go to the eye doctor for new eyeglasses in July, you could be reimbursed for the full cost (up to your annual election) even though you may not have deposited the entire amount of that expense by that time. Read this last statement and believe it! It’s true. There is no other bank account like it. The full amount you elected for health care expenses will be reimbursed even though you may not have deposited the entire amount by that time. It’s a whole lot better than making minimum monthly payments on a credit card.
The work-related dependent care FSA works a little differently, more like a regular bank account, but still tax free. We’ll talk more about this later.
Tell me some of The Rules.
There are always rules when Uncle Sam gives us a tax break. Your retirement plan has rules. There are rules when you deduct the interest payable on your home loan. We all like a tax break. Nobody likes rules. But, rules aren’t hard to live with once you know what they are.
The rules aren’t hard to live with once you know what they are. FSAs let you to pay for certain qualified expenses . . .TAX FREE. . but you have to: plan ahead because you can only enroll once a year; and your election, with few exceptions, can’t be changed during the year; and any money left in your account at the end of the year cannot be returned to you.
So how do you know in advance how much money to put into your FSA?
The Secret of living within the rules!
Look for eligible expenses that are “repetitive or predictable” and you know you will be buying anyway!
Repetitive Expenses (costs you have all the time)
Prescriptions – maintenance medications
Dr. office visits – for visits you go to regularly
Dental cleanings & exams
Orthodontics / Braces
Predictable Expenses (costs where you can plan for them and decide when)
Surgeries that are planned
Dental fillings, crowns, etc.
Eye exams & prescription glasses
Work-Related Dependent Care
Use this account to keep the kids, tax free, at the sitter or at daycare while you work. It shouldn’t be too hard to “guess-t-mate” the annual amount paid to them.
In the situation of divorce, only the custodial parent may participate in the work-related dependent care FSA.
Knowing The Secret makes living with the rules OK.
All these expenses are for things you know you will be buying anyway and therefore the rules don’t really mean anything. You know at the beginning of the year how much you will spend ….. you are going to spend the money anyway …. so you don’t have to worry about leaving any money in the account at the end of the year.