If we told you that you could save up to 30% on medical expenses, would you be interested? The cost of healthcare can be overwhelming and even with insurance people find themselves spending a significant amount of money on medical costs. For the next few weeks in our BrightDime Basics series, we’ll continue with the “saving” theme, with a focus on how you can save for healthcare in your benefit plans.
Many employers do offer ways to help employees save for their healthcare expenses with a Health Care Flexible Spending Account (FSA) that you can enroll in and use to pay for certain out of pocket costs. Things like co-payments, deductibles, prescription drugs, dental, vision and some other health care costs can be paid for with before tax dollars. With an FSA you should save for expenses you estimate you will incur in the next year only. There’s generally no rollover (check your plan rules) so if you save $1,000 and only spend $750 you lose the extra $250. This is different than an Health Savings Account (HSA) which we will cover next week.
So how does it work and how can you get to the 30% savings? Here is an example. If you enroll and estimate you’ll spend $1,000 on healthcare expenses next year, your employer will reduce your pay by $1,000 (before any taxes are withheld) and put these funds into an FSA for you to spend on qualified medical expenses. With a $40,000/year salary, instead of paying taxes on $40,000, you will pay taxes on $39,000. If you are in a 20% federal tax bracket, your tax savings is $200, and with your additional savings from your state, local and FICA taxes, you move up to the $300 (30%).
Since these accounts are governed by the IRS, they do have strict rules about how much you can contribute, what expenses qualify, and whether you can make mid-year changes to your contribution amount. Most importantly remember that what you don’t spend by year end could be lost. So you need to be extra conservative when estimating your expenses. For more details about FSA’s, read more here and check with your employer.
Have questions about how a FSA can help you? Login and chat with a BrightDime coach.