What’s the Right Amount for my FSA?
With the popularity of flexible spending accounts on the rise, participants want to know, “What’s the right amount to put in my FSA?”
Flexible Spending Accounts (FSAs) are fast becoming one of the most popular employer-sponsored benefits in the United States.
Why are FSAs popular?
According to FSAFEDs.com, the official FSA website for federal employees, taking advantage of the pre-tax paycheck deductions afforded by FSAs can save an average of 30 percent on eligible health care expenses. With healthcare costs continuing to rise, that can be a big help to families looking to stretch their dollars.
How do FSA Accounts Work?
Each year, employees working for companies that offer an FSA must elect to participate and choose how much to contribute. In 2024, the limit goes up to $3,200.
The total annual election amount is available to the FSA participant on the first day of the plan year. Over the course of the year, the participant’s pre-tax deductions are spread out equally and set aside each pay period. When participants incur an eligible expense, they submit a claim and get reimbursed by their company’s benefits administrator.
Some vendors set up FSAs, so they automatically receive common medical expense notifications. These expenses could include things like a visit to the doctor or a prescription purchase. That way, they don’t have to submit a claim for reimbursement. However, once their funds have been exhausted, employees can no longer receive reimbursements until the following plan year.
In the past, FSAs had the “use it or lose it” rule. Participants who didn’t spend all of their FSA balance by the end of the plan year lost those funds. Recent changes in FSA regulations now allow employers to choose to offer either a FSA Carryover or a grace period instead of “use it or lose it.” For 2023, under FSA Carryover, you can carry over up to $610 to the following plan year. Under a grace period, you get extra time at the end of the plan year to spend down your balance. The employer chooses which option to offer. Check with your HR as to what your company’s FSA plan allows.
How is my FSA amount calculated?
Regardless of whether your FSA plan offers Carryover, grace period, or “use it or lose it,” employees must consider carefully what the right amount for their FSA will be each year.
It’s impossible to know exactly how much you may need to cover eligible expenses. Instead, aim for a reasonable estimate. Review your current year’s medical, dental, and vision care expenses and list what you expect to need next year. Remember to include deductibles, co-pays, co-insurance, urgent care and ER visits, prescription costs, and any planned surgeries or procedures, as well as:
Dental costs, including orthodontic work
Vision expenses, including exams, eyeglasses and contact lenses
Counseling and psychiatric care
Medical equipment and supplies
Physical therapy and other treatments
The employer’s healthcare benefits summary plan document, available from HR or your group insurance carrier, can provide helpful information when estimating medical costs. In addition, if you know you will be undergoing a major procedure next year, it can help to contact your insurance company about your likely out-of-pocket share of the total cost.
View a list of IRS-approved FSA-eligible expenses.
Don’t Expect to Get it Perfect
Most people can track their out-of-pocket medical expenses with reasonable accuracy. The hard part comes from estimating emergencies and unexpected costs. When reviewing these expenses, consider factors such as your age, general health, and any chronic conditions. Then do the same for all family members.
It also helps to pre-plan some expenses for the end of the plan year just in case you have unspent funds in your FSA account. For example, ordering a pair of prescription sunglasses; replacing a problematic dental filling; or stocking up on over-the-counter medications and products that don’t have short-term expiration dates, such as bandages, diaper rash creams, antiseptic ointments, menstrual care items, and breastfeeding supplies.
In Summary
Figure what you typically spend out-of-pocket on medical, dental, and vision care over the course of the year for yourself and tax dependents
Consider building in a cushion for unexpected medical expenses such as urgent care and ER visits
Use your best estimate to determine your annual election amount
Find out how your employer’s plan treats unspent balances at the end of the year and have a plan for spending down your unused balance if needed.
With careful consideration, the process of calculating the right amount for your FSA account can be easier than you may have thought. The tax savings and convenience that FSA accounts provide certainly make it worth your time and effort.
