If you’re ever had to pay medical expenses out of pocket, you know how costly it can get. Luckily, if you are employed, you may be able to get a Flexible Spending Account, or FSA, through your employer and save big on medical expenses. A FSA will cut down on your medical expenses and lower your taxable income. Here is a guide to have a FSA works and how you can use it save money.

What is a Flexible Spending Account?

A FSA, also known as a flex plan or a reimbursement account, is a pre-tax account in which you can designate a portion of your paychecks. The money in the account can be used to pay for approved medical expenses that may not be covered by your health insurance. Your FSA can be used to pay for your out-of-pocket expenses, such as prescription co-payments and insurance premiums.

How Does it Work?

FSAs work like this. At the beginning of the plan year, you will tell your employer or Human Resources department just how much you want to designate to your flex account for the year. To pick this amount, estimate how much you think you will pay for medical expenses throughout the year. Calculate your co-payments, prescriptions, dental visits, etc.

The amount you choose will go into a bucket account, which you can use at any time. The total amount will be divided up among your paychecks for the year, and will be deducted before taxes. The limit on how much you can contribute is usually chosen by the employer. Most will cap the amount at $5000, or a certain percent of your salary.

To get your money for your medical expense, most PSA plans require you to pay for your expenses out-of-pocket, and ask you to submit a claim to get reimbursed. Other plans will issue you a debit card to use when purchasing medical supplies or paying for bills. If your employer choose a plan that goes the reimbursement route, you will get your money back wither by check or direct deposit. This may take a little longer than using an approved FSA debit card, but the benefits are still the same.

What are the Advantages of a FSA?

The big advantage of a FSA is that it can reduce your income taxes. The money you designate to your FSA is deducted from your paycheck before your taxes are calculated, so they are not reported to the IRS in your income. This means that you are decreasing the amount you are taxed on, but you are still getting the money to spend. In addition, it just may bump you to a lower tax bracket, which will lower your tax payments and increase your take home pay.

Another advantage is that the account is prefunded. This means that if you say you want $3000 to go to your FSA, you will be able to use it immediately, even though the amount will be divided up between all your paycheck for the year. The biggest benefit of this is in the event of a medical emergency or big hospital and doctor bills. You will be able to use the money in your flex spending account, even if it hasn’t been deducted from your pay yet. This is great for families that are expecting a birth during the year, or have a planned surgery coming up.

There is also a FSA loophole. If you leave your job before the plan year is up and have already used up all your flex spending account money, you are not required to pay back that negative balance. Sounds too good to be true, right? The reason for this is because your negative balance gets evened out by the funds that go unused by other employees. Morally-wise, you probably shouldn’t go signing up for a FSA to help pay for something when you plan on quitting, but just know that you could if you needed to.

Are There Any Disadvantages?

Flexible Spending Accounts are looking pretty good right? And they are. If you plan out your expenses and allot the right amount of money, there are many benefits to be had. The major disadvantage to having a FSA is that the money is subject to the “use or lose it” stipulation. Say you pledge that $3000 to your account. You won’t feel the pinch that much since it will be broken up over all your checks, but you have to use the entire $3000. If you don’t, that money goes back to your employer at the close of the plan year. This is a case where it is better to under-estimate than to over-estimate. Because of this con, it is important to be conservative when you choose how much you want to put in your FSA.

If you accumulate a lot of doctor and other medical bills throughout the year, then a Flexible Spending Account can save you a ton of money. The amount you designate to your FSA is pre-tax dollars, saving you money on medical expenses and on taxes. Sounds like a good deal all around.

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