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Pros and Cons of FSAs and HSAs - Part 1

by Peggy L Farnworth

posted in Insurance

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Part I - FSA
As the time approaches to sign up for your company cafeteria plan, which do you choose the Flexible Spending Account (FSA) or the Health Savings Account (HSA)?
Much depends on your unique family situation. Let's explore how each program works.
Flexible Spending Accounts
FSAs are available only through an employer. You deduct anticipated medical expenses for the coming year. These deductions reduce your taxable income and also reduce your social security and Medicare taxes.
The maximum amount you can contribute is $2,550. The maximum is the same for the singles and families. An employer may make contributions to the FSA. These do not count against the maximum contribution allowed.
The FSA is used to pay your out-of-pocket medical expenses. Approved expenses include co-pays, deductibles, co-insurance payments, dental and vision expenses. You can't spend FSA funds on health insurance premiums.
One advantage to FSA plans is the full contribution amount you select is available up front. If you have a major expense like braces for your child, or diagnostic testing, those expenses can be paid at the first of the year up to the amount of your annual contribution - even though you have not paid in the full amount. The employer fronts the money. If you leave employment before the end of the year, your employer may withhold any amounts due from your last check.
A disadvantage to FSA is the "use it or lose it" factor. If you make contributions to your account and do not 'use' all of your contributions by year- end, you lose the balance of the account. The employer retains any remaining balances. This is estimated to be up to 14% of the total employee contribution. To soften this disadvantage, legislation was adopted that allowed an employer one of two options:
1. The employee may rollover $500 into the next year to be used.
2. Provide a "grace period" of up to 2.5 months to use the remaining money in an FSA.
Your employer can offer either one but not both. However, they are not required to offer either option. The $500 rollover is an easy option to add with virtually no additional cost.
Using an FSA requires you to plan wisely even if your employer adopted one of the flexible options. You can't change your contribution once an election is made unless you have a life changing event such as marriage/divorce, new baby.
Tip: How much do you put in? What are your 'known' medical expenses for the year? That is your minimum allocation. If you have the $500 rollover exception, that is your minimum or that plus your known medical expenses.
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