Advantages and Disadvantages of Medical Expense FSA
Many employers today are offering employees a flexible spending account (FSA) for medical expenses. These accounts are designed to be used for any medical expenses you incur that aren't paid by your insurance plan. They're particularly helpful if you need money for things your plan just doesn't cover, like dental or vision care. The eligibility for an FSA is set by your employer, and you can only contribute if you have an insurance plan that has a high deductible.
Like any savings plan, there are pros and cons. Naturally, the biggest pros is having money available for medical expenses if you need it. Beginning in 2013, there will be a limit of $2500 per year that can be placed into an FSA. Currently, there is no limit unless your employer has set one. Still, if you don't use that money by the end of the year, it's forfeited back to the company and you don't get to keep it.
If you need it before the year is out, though, the total amount you elected to put into the account is yours to use, even if it hasn't all been deducted from your paycheck. That can really help you when it's early in the year and you have a problem where you need to use the money you elected to put into the account.
Watch out for that end-of-the-year disappearing act, though, if you don't use the money. It can be frustrating to lose it just because you didn't have a medical need. Also, keep in mind that the employer owns your account, because he or she set it up for you. Once it goes into the FSA, it's really not your money anymore. You may also be asked to prove how the money was spent, so save your receipts.
Instead of an FSA, some people put their money into a health savings account, or HSA. Unlike an FSA, an HSA is not owned by your employer. It's a bank account, and it's owned by you. Wherever you work, or even if you're self-employed or unemployed, that account is yours. You won't lose the money at the end of the year, either. It will simply wait patiently, accumulating until you need it for something.
To be eligible, you have to have a high deductible insurance plan, which means at least a $1200 deductible for an individual or $2400 for a family, per IRS regulations. Your annual contribution limit for a family is more than $6000, though, so you can put in enough each year to cover at least most of your deductible, depending on how high it really is.
If you haven't put much in yet, and you need the money early in the year, you'll only have access to what you've put in, not how much you've elected to put in for the year like with an FSA. Keep that in mind when you're budgeting your money and contributing to an HSA. Remember to save your receipts, too, but only in case the IRS asks for them in an audit. Your account won't be "policed" by anyone else, and you can change your monthly contributions at any time.