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Flexible Spending Account: Are You in the Sweet Spot?

Many workers use a Flexible Spending Account (FSA) as a tax-deductible way to pay for out of pocket health care expenses. These accounts can be very useful, and provide you with tax savings. However, the money in a FSA is a use it or lose it situation. If you don’t spend the money by the appointed time, you lose the money that’s in the account.

The deadline varies according to employer. Some employers require you to use the money by December 31. If this is the case, it’s too late for your 2011 FSA money. It’s already gone. However, if your employer uses March 15 as the deadline, you still have time to use your FSA [3] money from 2011.

Finding the FSA Sweet Spot

For those who have a March 15 FSA deadline, there is a period of time known as the sweet spot. Perhaps you have $1,000 in your account from 2011. However, you also plan to contribute $2,000 during 2012. You can actually add those two amounts together to get a total of $3,000 available for your use right now.

This large of available money means that you can have more expensive work done now. If you’ve been planning on having your wisdom teeth out, or if your kids need braces, you can use that larger amount of money to take care of what’s needed. However, make sure you use the FSA money from 2011 up first. You don’t have to use the 2012 money all at once, so you can spread that out throughout the year.

Changes Coming for the FSA

Right now, your employer decides how much money you can contribute a FSA. Many employers cap the amount of money at anywhere between $3,000 and $5,000. This is a tax-deductible contribution that you can use for qualified medical expenses [4]. Unfortunately, 2012 is the last year that such generous contributions will be allowed. Starting in 2013, by federal law, the maximum amount that you will be able to contribute to your Flexible Spending Account will be $2,500.

For those whose employers already have low limits, such as between $1,500 and $3,000 a year, the new cap isn’t such a big deal. But more generous FSA plans are another story. If you are used to being able to contribute $4,000 or $5,000 to your account, the $2,500 cap is a real let down. This means that if you have been planning to get Lasik, or if have some other optional medical costs you have been considering, this is the year to do it with the tax benefit. As long as you know you will use the money, contribute as much as you can to your FSA so that you can the best bang for your buck.

What about the HSA?

It’s important not to mix the Flexible Spending Account up with the Health Savings Account [5]. A HSA is not lose it or lose it. Instead, it provides you with a tax deductible way to pay for out of pocket expenses without the risk of not using all your money. The contribution limits are higher as well, and when you get older, your HSA can function as a traditional IRA. However, you do need to have a high deductible health care plan in order to be eligible for the HSA.

If you have a high deductible plan, it might be worth it to consider switching to a HSA, since the FSA will soon provide fewer benefits.

(Photo: adrianclarkmbbs [6])