Benefits (and Cautions) of Flexible Spending Accounts

Oct 9, 2017 | Robert McGriff | @m039153 | Comments (2)



Flexible Spending Accounts (FSAs) have been around since the 1970s. As employers started to pass some of the cost of providing health coverage to the plan participants (employees and family members), Congress offered FSAs as a method to pay for out of pocket medical costs with pre-tax dollars.  In 1985, FSAs were expanded to include expenses for employment-related day care expenses.


An FSA can be a great way to pay for certain expenses with pre-tax dollars. Contributing $100 to an FSA might only impact your paycheck by $80 because of the tax savings (see table below).

Without FSA With FSA
Gross Earnings per pay period $2,000 $2,000
Pre-Tax FSA deduction $0 $100
Taxes at 20%* $400 $380
Net Pay $1,600 $1,520
*Based on assumptions. These figures have not been evaluated by a tax professional.


In this example, someone who makes $52,000 per year elects to contribute $2,600 to an FSA. On an annualized basis, they have $2,600 in an account to pay for expenses but their take home pay was only reduced by $2,080.  That’s a potential savings of $520!

Additionally, in a Health Care FSA, the amount that you agree to contribute for the year is available to you at any point in the year. So, if you elect to contribute $1,000 over the course of the year, you could submit a claim and be reimbursed for the full $1,000 in January.  Using an FSA can help to distribute the burden of medical expense throughout the year.


Generally speaking, the big concern with an FSA is known as the “use-it-or-lose-it” rule. In the same year that you contribute to an FSA, you must have an expense in order to submit a claim and get reimbursed.  Unused amounts at the end of the plan year are forfeited.  An FSA should not be treated as a “rainy day” fund or a “just in case” fund.  Rather, you should use an FSA as a method to pay for a predictable expense with pre-tax dollars contributed throughout the year.  In the Affordable Care Act (ACA, Congress introduced a small rollover provision for Health Care FSAs.  Today, up to $500 of unused funds in a Health Care FSA can be allowed to rollover to the following year.  However, balances over $500 and all unused dollars in a Dependent Care FSA are at risk of forfeiture.  Be sure to plan wisely when you are deciding how much to contribute to an FSA.


Read your open enrollment materials carefully. If you think that an FSA is the right choice for you, Open Enrollment is the time to take action.  Between Nov. 1st and 15th, you will need to access Employee Self Service to elect FSA contributions for 2018.

I was on Mayo Basic last year and have money left in HSA. I’m on Mayo Select this year and setup FSA. My son had surgery this year and I don’t have enough money in FSA to cover, can I use HSA from last year?


Yes. You could certainly use your HSA funds for that remaining expense.

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