How would you like to get a huge discount on all your out-of-pocket health-related spending, including doctor co-payments, eyeglasses, aspirin, hearing aids, birth control, braces and smoking-cessation products?
You can get the discount - in the form of tax-free spending - if you have a flexible spending account through your employer. If you don't use one, you could be wasting hundreds of dollars a year.
Though FSAs have formally been around since the 1970s, they are a seldom-used employee benefit. FSAs are available from 81 percent of large employers, yet just 1 in 5 eligible employees uses the benefit, according to Mercer Human Resource Consulting. Only about a third of smaller employers - those with fewer than 500 employees - offer an FSA.
FSAs do take an effort to understand and use, and when you combine the confusing topics of health plans with taxes, many eyes glaze over. But FSAs have become more attractive in recent years because the Internal Revenue Service loosened restrictions on what you can buy with the tax-free money. And using the accounts has become easier with the dawn of automatic reimbursements and FSA debit cards.
An employee who contributed to a health care FSA in the 2006 average amount of $1,261 would see a net tax savings of $504, according to Mercer. That assumes income taxes, Social Security and other deductions would have amounted to 40 percent and the employee depleted the account on items he or she would have bought anyway. Employees in low-income tax brackets and with low state taxes would save somewhat less.
Flexible spending accounts - altogether different from the newer health savings accounts - work like this: You designate a yearly amount to contribute to the FSA. Your employer deducts a prorated amount before taxes from paychecks all year long. Whenever you pay for an approved medical item you draw down on those pretax contributions, essentially getting big discounts on what you buy.
At the end of the year - or often until March 15 of the next year - you forfeit any balance left over. You must re-enroll in an FSA every year.
During the benefits enrollment season for 2008 everybody eligible for an FSA should consider using it, said Barry Schilmeister, a principal at Mercer. "It's a terrific vehicle," he said. "When you think about it, you're going to spend that money. Why not do it in as tax-effective a way as possible? I think a lot of people just don't do the math."
Here are answers to FSA concerns:
"I'll lose my money if I don't spend it all."
The "use it or lose it" rule isn't as daunting as it sounds. That's more true since the IRS loosened rules on FSAs in 2003 to include over-the-counter drugs and again in 2005, when it allowed a 2 1/2 -month grace period for purchases spilling into the next calendar year.
Near the end of the FSA year, if you spent less than expected on medical purchases, you can use the money to stock up on qualifying items before the money disappears. For example, you could buy contact lenses and solution, over-the-counter cold and flu medications, Band-Aids, prescription sunglasses, acne treatments, antacids, allergy medication, hearing aid batteries, pain relievers, reading glasses and orthopedic shoe inserts. Or you could schedule appointments with eye doctors and dentists before the use-it-or-lose-it deadline.
Even if you don't spend every dime and forfeit some money you'll likely come out far ahead, compared with not using an FSA at all, because of the huge tax savings. Most people are good at using FSA money. In 2006, employees forfeited just 4 percent of the money contributed to FSAs, according to Mercer.
"It's too difficult to use."
It's true the traditional way of using an FSA is a hassle. You pay for the medical item or service out of pocket, file a claim and get reimbursed. But today some plans have automatic reimbursement for some spending, such as at a pharmacy.
Easier yet are plans that use flex cards, a debit card to pay for health-related expenses. You use the card, which piggybacks on Visa and MasterCard networks, to buy approved items as if you were making a regular credit-card purchase at a drugstore, for example.
At MyCafeteriaPlan, a third-party administrator of FSAs, about 65 percent of their plan participants use debit cards, said David Turner, vice president of marketing and sales for the company.
"I can't afford another deduction from my paycheck."
If you think you can't afford an FSA, you're not getting the concept. This is money you would have spent anyway. You're just getting a huge discount on some of your everyday spending.
"I can't decide how much to contribute."
If you keep a household budget or use spending-tracking software such as Quicken you should be able to deduce how much you spend annually on eligible items. Otherwise, try out an FSA with a modest amount. For example, most families will easily spend $500 on medical-related items in a year.
One danger of FSA spending arises if you use the money to buy a lot of products and services you wouldn't otherwise buy. Even if you're getting a 40 percent discount on a medical item you don't need or want, it's still a 100 percent waste of money.
Gregory Karp writes for The Morning Call in Allentown, Pa.