With the beginning of the fourth quarter comes Open Enrollment season. This is the time of year where you can elect changes to your benefit plans through your employer – Medical, Dental, Vision, contributions to Health Savings Accounts or Flexible Spending Accounts, and many other benefit plan decisions.
Health care expenses can be significant and unpredictable. This is especially true of the out-of-pocket costs that crop up beyond the standard health insurance premiums, making it important to have a plan in place in order to cover these unexpected expenses. Emergency funds can help alleviate the pressure of unexpected costs that life inevitably throws at us, such as vehicle repair or a furnace replacement. When it comes to health care expenses, there are various options available specifically for helping you save to cover health care expenses. One of the most common options is a Flexible Spending Account.
A Flexible Spending Account (FSA) can be used to pay for health care costs, like deductibles, copayments, coinsurance, and prescription costs. Typically, during your employer’s open enrollment period, you’ll be able to open one of these accounts. At that time, you specify how much you want to contribute for the upcoming year, up to an annual contribution limit per year per employer ($3,300 limit in 2025). Throughout the next year, a fraction of that total annual amount will come out of your paycheck each week. A major benefit of an FSA is that you can spend up to your full year’s contribution amount before you have reached the final allotted contribution amount.
Another perk of an FSA is that it can potentially reduce your tax bill. Any funds that are contributed to your FSA is taken from your paycheck pretax, so your contribution amount reduces your taxable income for that year. Keep in mind that when filing a claim, you must submit the proof of the medical expense promptly. Failure to do so will add back the amount of your expenses back to your taxable income.
One aspect about an FSA to be aware of prior to signing up is that, generally, the money you contribute must be used by the end of the year, or else you lose it. Your employer may offer one of two options for you to be able to use the money beyond the designated plan year.
- Provide a ‘grace period’ of up to 2.5 extra months to use the money in your FSA. So if you have a balance on January 1st left over from the previous year, you would have up until March 15th to use the rest of those funds.
- The second option allows you to carry over the balance to use in the next year, up to $660 (2025 limit).
Make sure you know which option your employer has opted to adopt, if any, so you can plan accordingly.
So how much should you contribute to an FSA? To determine that for yourself it is important to consider factors such as your health, your family’s health, how much you go to the doctor or dentist during a typical year, and the size of your deductible. Injury and illness can be unpredictable, but you may already have scheduled routine visits to the doctor and dentist for regular checkups. 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 adopt the carry over option, then you might consider contributing the maximum carry over limit. This way even if you have no out-of-pocket medical or dental expenses during the year, you wouldn’t lose what you had contributed come January 1st.
Creating room in your budget can allow you to continue saving and investing in the face of life’s unexpected costs. At least for medical and dental bills, consider a Flexible Spending Account as a useful resource to add to your financial toolbelt. Reach out to Visions Wealth Management today to determine whether an FSA could potentially fit into your financial picture.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.