Health care costs can be unpredictable, yet significant. These expenses can make or break a family’s budget. In particular, the out-of-pocket costs beyond health insurance premiums can impact your financial wellbeing greatly. Being prepared to cover those expenses may mean the difference between your budget going off the rails or going by the book. As a way to prepare for unanticipated bills, think about starting to set money aside. Emergency funds are beneficial, as they can be used to cover any type of unexpected cost life throws at us. For health care expenses, there are various account types that can be used to help cover these needs. One of the most common health care expense accounts is a Flexible Spending Account (FSA).
If you have a health plan through a job, you can use an FSA to pay for health care costs, such as deductibles, copayments, coinsurance, and medications. FSAs can potentially reduce your tax bill as well. During your employer’s open enrollment period, you can opt into using one of these accounts. When opting in, you specify how much you want to contribute for the next year, up to an annual contribution limit per year per employer ($3,200 limit in 2024). Throughout the next year, you have a fraction of your total contribution come out each paycheck. One perk is that you can spend up to your full year’s contribution amount any time throughout the year regardless of how much of the total you have contributed thus far. Contributions to your FSA come from your paycheck pretax. When you file a claim, you must submit the proof of the medical expense promptly. Failure to do so will add the amount of your expenses back to your taxable income.
One aspect about FSA that can make people hesitant to use one is that generally the money you contribute must be used by the end of the year or you lose it. Your employer may, but is not required to, offer one of two options (not both) for you to be able to use the money beyond the plan year.
- The first option provides a ‘grace period’ of up to 2 1/2 extra months to use the money in your FSA. This means if you had a balance on Jan 1st left over from the previous year you have up until March 15th to use the rest of those funds.
- The second option allows you to carry over for use next year up to $640 (2024 limit).
So how much should you contribute to an FSA? For the most part, that is highly dependent on your health, your family’s health, and how much you go to the doctor or dentist during a typical year. While you may not be able to know in advance if you will have an injury or illness, you may have scheduled routine visits to the doctor and dentist for regular checkups already planned. The total of those deductibles/copays is typically the least amount you’d want to consider contributing per year. If your employer has opted to allow a carryover into the next year, another way to approach it is to contribute at least that amount. This way even if you have no out-of-pocket medical or dental expenses during the year you aren’t contributing an amount you’d lose come next January 1st.
Creating room in your budget can allow you to continue saving and investing in the face of life’s unexpected costs. For medical and dental bills, a Flexible Spending Account can b a useful tool to add to your financial toolbelt.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.