Reduce Your Medical and Dependent Care Costs with the Help of Uncle Sam – Using Flexible Savings Accounts

Both medical flexible spending accounts and dependent care accounts are funded with pre-tax deductions from your paycheck. Both have a “use or lose” policy if the funds deducted are not used in the calendar year for which the election is made.

Generally, an individual can only elect to have these deductions taken at the time of hire or during the annual enrollment period that each company offers its employees to make changes to their health and welfare benefits. (There are also other times during certain “life events,” such as marriage or the birth of a child, when benefit elections may also be changed.)

Since the election to make these deductions is made for a full year, one must be very careful with the amount chosen. If you don’t use the funds for eligible expenses in the allowed time period, you won’t be able to get the money back.

For those with young children or elderly parents who need day care, the Dependent Care FSA can be helpful. The maximum amount that can be set aside is set at $5,000 each year. Given that child and adult care costs are what they are, an employee is unlikely to end up not using the full amount set aside, so it makes sense to maximize it.

However, the dependent care program only allows an individual to receive funds that are already in their FSA account, regardless of how much they have already paid the individual in dependent care expenses. For example, if a person chooses the maximum of $5,000 to withdraw over the course of the year, after 3 months there is only $1,250 in the account. Even if the person has already paid more than that to the child care provider, they can only receive the balance.

However, with the medical flexible spending account, a person can be repaid at any time during the year up to the annual amount chosen to be withdrawn. Therefore, the individual may receive FSA funds before the funds have been withdrawn from their paycheck.

Let’s say you know you’re having a surgical procedure in January and it will cost about $5,000, so you elect to have $5,000 deducted from the medical FSA during the open enrollment period. In February, he pays his share of $5,000. Even if you only have about $800 or more in your FSA account, you can file a claim for reimbursement for the full $5,000 you paid.

It’s wise to review what your anticipated medical expenses may be for the coming year, verify that they are eligible FSA expenses with your employer’s FSA administrator, and then make the election. It doesn’t hurt to underestimate, so you may have to pay for some expenses with after-tax dollars, but that’s much better than giving money away because you overestimated and lose what you had deducted and didn’t use.

Some examples of using a medical FSA are when you incur expenses for orthodontia and dental procedures for which you have a high deductible and/or copay. Regular copays for doctor’s office visits, which are generally not exceptionally expensive, are eligible for FSA reimbursement. If you go often enough, even saving a few tax dollars can be beneficial.

Using the FSA is a great tool for enforcing a disciplined savings program to cover expenses you expect to incur during the year anyway. And by doing so through a tax-deferred program at work, you’re ultimately reducing the cost by your marginal income tax rate so your savings can be stretched out to buy you more services. (For someone in the 20% marginal tax bracket, for example, you would have to earn $1.25 to have enough cash to pay $1.00 for utilities after the tax hit.)

By taking some time to project your personal expenses, you can ultimately benefit from the help of Uncle Sam.