I wanted more info on opening a flexible spending account for medical expenses. I dont know much about them except that I should have one. How does it work? I would love to get one up and running for 2011! How much do you budget per person? -Mary
I have received numerous emails regarding setting up a IRS-approved savings account for medical expenses after my post a couple of weeks ago on HSAs. Right now, my understanding is there are several options: the Flexible Savings Account (FSA), the Medical Savings Account (MSA) and the Health Savings Account (HSA) (See IRS Pub 969)
I do not know much about the FSA, as I have personally never had one. My understanding is that you set aside a certain amount each month for qualified health expenses and that, if you do not use all the money you have set aside by the end of the year, you lose whatever you have left because it does not roll over and accumulate into the next calendar year.
Because I didn’t want the hassle of trying to guess what expenses we would have over a year’s period of time and I didn’t like the idea of losing money we do not use, I didn’t even look into the possibility of opening an FSA. Instead, we elected to open up an HSA, which would allow us to keep the money we put in over the course of a year (up to $6150, married filing jointly for 2010) that would then be tax deductible on our 2010 return.
The MSA is similar to the HSA, but created for the self-employed or employees of small businesses. To open the HSA, I called a local broker who sold a variety of health insurance products from a number of different companies so I could get a good match for us that qualified under the IRS’s guidelines for a High Deductible Health Plan.
Once we got the health insurance side squared away, I contacted a local bank that had a Health Savings Account product, into which I put our annual contributions. The money in this account, if unused for medical expenses, rolls over annually and continues to build and grow interest.
I take what we would probably pay for regular PPO coverage, subtract what we currently pay for our HDHP coverage and put the rough balance in our HSA. At this stage, the annual contribution allowance covers the high deductible we have on our health plan, so we would technically not be out of pocket anything if we had a major medical condition that wiped out our deductible because our plan covers 100% above our family deductible. (Some HSAs are 80/20 instead of 100, but I wanted to stay away from something that would leave us exposed to liability in the event we maxed the deductible.)
As of now, I have been very pleased with it and it is amazing how much more aware we have become with our medical needs when we are on the hook for most expenses.
Jesse Paine is a licensed attorney who owns his own law firm. He’s married to Crystal and is the numbers nerd of the MoneySavingMom.com team! If you have a question you’d like him to answer in a future column, you can submit it here.
The content of this column intended for informational use only and is not to be construed as providing legal, investing, accounting, or other professional advice. Your situation is factually specific and you should accordingly seek qualified professional counsel concerning your specific legal, investing or accounting needs.
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I haven’t been able to get our FSA card to work on doctor copays, which is a little frustrating, but it is great for paying for prescriptions. I have a lot of medication I have to take, and the way our FSA plan works is:
A set amount is decided during the enrollment period. Over the course of a year, amounts equal to the total amount are taken from the paycheck, pre-tax. However, the entire amount is available to use immediately, in the form of a debit card. For example, I figured up the cost of the medications I would need over the course of a year, and then added in an extra $20 every other month to cover other problems that come up (which it’s a good thing I did, as now my daughter needs ADD medication and that is paid for with the card!). We got the $600 to use all at once on the debit card, but it comes out each week as $10 or so off the paycheck (not quite sure on the figures there) before taxes.
This has made getting our prescriptions very easy, because before we were struggling to pay the big copays on 3 month prescriptions (the only way our insurance will let us get recurring prescriptions) and now we don’t have to worry about it. We will always have money to pay for the prescriptions, and that freedom of mind is worth a LOT to me.
My husbands new employer last year set us up with a HDHP and an HSA..to which THEY contribute $6000 a year (the same as our deductible)! They told us this was the cheapest way to offer free healthcare for their employees. This last year I have more than $3000 left in my HSA, even after stocking up on OTC meds this past December.
Question: Since our insurance pays 100% after the $6K deductible, I’m wondering how I will ever use all the money in my HSA? I know it carries over but can I ever get the excess money without paying penalties and fees? Do I just need to save it until retirement or until our insurance coverage changes? We are only in our twenties and could end up with $10s of thousands of dollars in our HSA if there are several years where we don’t meet our deductible.
I used to love our FSA and at the end of the year would stock up on disposable contact lenses if there was money left over. However, last year my husband’s company switched who managed their FSA and we had a TON of trouble with it. In August, we received a letter from them asking us to “substantiate” a large number of our “claims”. In reviewing what they wanted “substantiated” it was EVERY visit to a doctor, dentist, eye doctor, or hospital, pretty much every claim that was put through with the exception of our prescription co-pays. To put a “claim” through, we simply used the debit card they gave us and the place of business submitted the bill to them. We had to contact each place and ask them to send us a bill with whatever code the FSA company was looking for and then fax/send them all to the FSA company. It took several hours of phone calls to do this and I think it was ridiculous on their part to even ask for it, but I did it. We faxed AND mailed the papers to them (I did not save copies, but now wish I had) and thought all was well. Then last week we received a tax form from them stating all the money we had used for those visits were being reported as income unless we sent them all those forms within a week. In our case, this will result in a negligible amount of additional taxes, if any at all, so I cannot be bothered with going through all of that again. Just be warned that some FSA companies can be extremely difficult to work with. Doctors visits are covered under FSA, as well as dentists, eye doctors and hospitals. If they have submitted a bill for me or my covered family member, it should not need to be “substantiated”. JMHO
We loved the FSA we had while I was still working. It is especially great if you know you’ll have MAJOR medical expenses in the coming year. For example, we had a baby due last May, so going into the year, we knew we needed to put as much into it as we could, and we spent it all without any trouble. Since it went straight into the saving account, and never into my checking, we didn’t miss the money, and we had it available to cover the cost of our son’s birth when the bills came. And we never had to pay tax on any of those earnings, so it worked out great.
I was trying to print this entry off for my husband, but it takes me to a totally different entry (Babbling Becca’s). Am I doing something wrong? Love that feature though!
My family uses a FSA. I love it. I have a family of 6, my children range in age from 9-21 and this has been a great tool for my family. I have never had a problem with leaving money in the account. It comes in handy for all those co-pays, unplanned prescription, glasses, dentist, and so much more that can add up with a larger family. I would recommend it to anyone.
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