Flex Your Way to Big Savings

By Carla Fried

In these times where raises are hard to come by, or barely keep pace with inflation, looking for creative ways to increase your net compensation becomes even more important. Exhibit A: Signing up for a Flexible Spending Account (FSA) can reduce your taxable income by at least a few hundred dollars a year, and often much more. That seems like an especially timely way to keep more money in your pocket these days.

As you’re perusing your benefits options during this Fall’s open enrollment season, maybe it’s time to take a serious look at how an FSA for 2012 could work for you. There are two types of FSAs: one for health care expenses and one that can be used to cover qualified dependent care expenses.

An FSA allows you to set aside money on a pre-tax basis into a special account that you can then use to pay for qualified expenses. The typical maximum amount you can set aside for a health-care FSA in 2012 is $5,000, per person. (Note: A provision of the federal health reform bill mandates a $2,500 maximum beginning in 2013.) So let’s say you decide to set aside $3,000 in 2012 into an FSA to cover all sorts of out-of-pocket medical expenses, and let’s assume your tax rate is 30%. That means you’ve effectively saved $900 for the year. And the good news is that everyone is eligible; there’s no income cut off.

With a health care FSA you can use money in an FSA to cover dozens of medical related expenses, including co-pays, deductibles, and the myriad expenses in which coverage is often limited, such as orthodontia or eye care (yep, contact lenses are covered.) Up until 2011 you could also use your FSA account to reimburse you for over-the-counter meds, but now you must have a prescription from your doctor to be able to claim those expenses. Yes, we have health care reform to thank for the fact that you now need to ask your doctor for a prescription if you want to be able to use your FSA to pay for the Tylenol and Advil.

If you have young children under the age of 13, or a spouse or parent you provide care for, a dependent care FSA can help you defray some of your costs of care. You can use this flavor of an FSA to pay for childcare, including, nursery school or for before/after school programs. If you plan on sending a child to day camp next summer, you can use a dependent care FSA to cover the costs (but not for sleepover camp.) The dependent care FSA can also be used to reimburse you for qualified expenses used to care for spouse or parent who needs assistance. The maximum household contribution to a dependent care FSA is $5,000.

The Use it or Lose It Catch

Okay, there’s one big honking problem with both types of FSAs: any money you set aside in an FSA but don’t spend is forfeited. There’s no carry-over provision. Some semi-good news is that you typically have 15 months, not just a year, to spend the money. For example, money you set aside in a 2012 FSA can be used to pay for eligible expenses through mid-March 2013. Your best move is to spend an hour or so tallying up your medical expenses for the past year that you paid out of pocket. Assuming your expenses were “normal” you could plan on setting aside 90% of that for next year’s 2012, to give yourself a little cushion if next year’s costs end up being a little lower than this year.