Flexible Spending Accounts

Everyone is looking for ways to cut down on the cost of health care. With projected health care costs increases of 7 percent for next year, there is no end in sight to the spiraling cost of keeping healthy in the United States. One way to keep your health costs down is by using a flexible spending account (FSA) instead of a savings account.

We sat down to talk with Elle Kaplan, CEO and founding partner of Lexion Capital Management* to talk about how you can get the most out of an FSA and not leave money lying on the table on December 31.

What Is a Flexible Spending Account?

A flexible spending account (also called a flexible spending arrangement or, more simply and commonly, an FSA) is a way that you can save for expenses using pre-tax dollars. “Most people focus on health care costs,” explains Kaplan, “but they can also be used for dependent expenses and travel costs.”

How do Flexible Spending Accounts Work?

Here’s how it works: You put money into this account for either your own personal health care costs or those of a dependent or any other qualifying cost. Usually this dependent has to be a child under the age of 13. However, you can also use the money to care for kids with disabilities (mental or physical), as well as seniors that you’re caring for, such as your parents.

You can use the money for just about anything that’s a necessary medical expense or travel expense covered by your plan. This includes, but is not limited to:

• Out-of-pocket copays
• Hearing aids
• Prescription drugs
• Mental health counseling
• Lab fees for medical tests
• Contact lenses and accessories
• Dental work and orthodontics not covered by your plan
• Optical exams and glasses

Basically, if you have to pay for it, you can pay for it using your FSA.

OK, So What’s the Catch?

Well, there’s one big one. You have the calendar year to use the money. After that, it essentially gets flushed down the toilet. While this might change due to the language of the Patient Protection and Affordable Care Act (PPACA, commonly known as “Obamacare”), for the time being, don’t put anything into an FSA that you don’t plan to use by the end of the calendar year. If you do, it’s gone. “At this point you’ve lost the advantage of pretax dollars,” Kaplan says. “You’ve got to use it or lose it.”

She compares not using your flexible spending account to not using a gift card from a restaurant. “Restaurants love these because most people never use them,” she explains. “People buy them at Christmas, give them out as gifts and the recipients forget that they have them.” To avoid this, she advises that you submit receipts to the FSA management company throughout the year, rather than saving them all up and waiting until the end of the calendar year.

The other catch is that there are limits on how much you can throw into the account. The worst part? It’s not uncommon for plan coordinators to neglect to tell you about these limits, meaning that you’re throwing money away. The limit for medical expenses is $2,500 and the limit for dependent expenses is $5,000. However, the IRS will adjust this tied to the increase of the cost of living.

Should I Open a Flexible Spending Account?

There’s not really a yes or no answer to this. If you think that you’re going to spend the money, go ahead and get one. If you’re young, healthy and don’t need to spend the money on your personal health care expenses, it’s basically a waste. “A family of four with a diabetic child will easily use their entire FSA in a year,” says Kaplan. “A younger person might only want to throw $100 or so into one. This is not a simple case of ‘everyone should do it.’ At the end of the day, you have to make the final decision.”

*Lexion Capital Management is one of the only 100 percent woman-owned and operated investment firms in the United States.