Both dependent care and medical flexible spending accounts are funded with pre-tax deductions from your paycheck. Both have a “use it or lose it” policy if the funds withheld are not used in the calendar year in which the election is held.
Typically, a person can choose to take these deductions at the time of hiring or during the annual enrollment period each company offers its employees to make changes to their health and benefits. (During certain “life events” such as marriage or the birth of a child, there are other times when help choices may also be changed.)
As the selection is made for a full year to make these deductions, one must be very careful about the amount chosen. If you do not use the funds for eligible expenses within the time allowed, you cannot get the money back.
For those with young children or elderly parents who need day care, the dependent care FSA may be helpful. The maximum amount that can be set aside is set at $5,000 per year. As with childcare and adult daycare costs, it’s unlikely that an employee will use the full amount allotted, so it makes sense to maximize it.
However, the dependent care program Only It allows a person to already have money in their FSA account, regardless of how much the person has paid in dependent care expenses. For example, if someone chooses a maximum of $5,000 to withdraw during the year, only $1,250 remains in the account after 3 months. Even if the person has paid more than that to the child care provider, they can only receive the balance.
However, a person with a medical flexible spending account, It is repaid at any time during the year up to the annual amount chosen to be withdrawn. Thus, the person can receive money from the FSA before actually withdrawing from their paycheck.
Let’s say you know you’re going to have a surgical procedure in January and your cost will be about $5,000, so you choose to deduct $5,000 from the medical FSA during the open enrollment period. You pay your share of $5,000 in February. Even though you only have $800+ in your FSA account, you can request a refund for the full $5,000 you paid.
It is wise to review what your expected health care expenses may be in the coming year, verify with your employer’s FSA administrator that these are eligible FSA expenses, and then make the choice. It doesn’t hurt to be underestimated, so you may have to pay for some expenses in after-tax dollars, but it’s still a lot better than giving the money away because you’ve overestimated and you lose what you cut and don’t use.
Some examples of using a medical FSA are incurring orthodontic costs and dental procedures for which you have high exemptions and/or co-payments. Regular doctor’s office visit co-payments, which are usually not exceptionally expensive, are eligible for FSA reimbursement. Even saving a few tax dollars can be beneficial if you go often enough.
Using the FSA is a great tool to implement a disciplined savings program to cover the costs expected in any case during the year. And by doing this at work through a tax-deferred program, you ultimately reduce the cost with your marginal income tax rate, so your savings extend to purchasing more services. (For example, for someone in the 20% marginal tax bracket, you would have to earn $1.25 to have enough cash to pay for services of $1.00 after taxes.)
By taking some time to plan your personal expenses, you can ultimately benefit from Uncle Sam’s help.