Happy November everyone! It’s my favorite time of year! I love the changing leaves, the fast approaching holidays and, call me a nerd, but I just love open enrollment! Last year I wrote a slew of posts (parts 1 – 3) about navigating open enrollment, starting a new job, and being a freelancer. This year, I’ve decided to focus on one of the benefits that my employer offers that I’ve been doing a ton of research on this year: flexible spending accounts.
Disclaimer: I am not someone who works in Human Resources, all of these opinions and facts have come from my own personal research as I’ve been deciding what to choose for myself. Please do your own research as well and talk to your HR department about what’s offered for you before making your choices. Hopefully, my research will help inspire you to take advantage of your own open enrollment offerings! 🙂
Biggest Benefits of These Accounts
One of the best things about these types of accounts is that they offer a way to use your money tax-free. You put the money in before paying tax on it and as long as it is used for approved health expenses, you never have to pay tax on that money!
Many employers also offer to put money in on your behalf. So in addition to the money you put in, they may put some in for you too. This helps offset what you may pay down the road if you need to use the account.
Things to Watch Out For
Sometimes these accounts have minimums that you need to put in each year, so be mindful of that. The IRS also sets maximums you can put in each year and limits how much can roll over from year to year if you don’t spend it. If you want to get super nerdy, check out the IRS website where they break down the restrictions and benefits of these tax-favored plans. Your employer has to follow the IRS rules so you don’t have to read that entire page, just check in with your HR department and they’ll help you get set up and navigate the restrictions.
You should also be aware of what happens to the money if you leave this job to work elsewhere. Can you keep the account? Will there be fees associated with keeping it open? Be sure to look at your plans carefully or talk directly to your HR department about your specific situation.
My employer offers three different flexible accounts so here’s a breakdown of how to use each of these types of accounts. Everyone’s benefit options are different, so see what’s offered for you and take advantage if it works in your life.
Health Savings Accounts (HSAs)
These are usually offered in lieu of a health plan or may be one of your medical plan choices. You and your employer both can contribute to the account. (If your employer contributes, we definitely recommending opting into the HSA if it’s on your plan. Otherwise you’re leaving free money on the table, similar to a 401k match!) This plan usually has a high deductible and a maximum limit on the sum of the annual deductible and out-of-pocket medical expenses that you must pay for covered expenses. “Out-of-pocket” expenses mean co-pays and medical expenses, but it does not include premiums.
The big pro of an HSA is that the account rolls over year to year, and “goes with you” if you leave your company. You continue to have access to the money (which is ideally invested and growing!) until you need it. It’s often referred to as a “secondary 401k” because it ups the amount of pre-tax dollars you can put away. This money will not be taxed if used for applicable health expenses, before or after retirement. Post-retirement there are ways to use this money for non-health expenses, but then you will face the applicable taxes.
Health Flexible Spending Accounts (FSAs)
This type of plan you can usually use with another type of medical plan. Your employer generally wouldn’t put additional money in but you can put in tax-free money to help pay for co-pays and health-related expenses that are not covered (or only partially covered) by your plan. You can also use them to pay for prescriptions and in some cases, alternative health options like acupuncture. Be sure to read the fine print on your plan so you can accurately estimate how much you want to put in each year.
You usually can’t change the amount that you elect to put in anytime during the year, you have to make a choice when you get hired or during open enrollment. You most likely will have to opt-in each year during open enrollment and re-elect the amount. The money is divided by 12 months or 24 paychecks depending on how you get paid, but you can use 100% of the money starting when the plan takes effect in January. The one caveat to this is that most FSA plans do not roll over or at least do not roll over 100% of funds; it’s a “use it or lost it” benefit, so in December you may find yourself spending to “empty out” that account or get it below a rollover threshold.
Dependent Care Flexible Spending Accounts (FSAs)
This account is very similar to the health FSA (mentioned above) but the money is used for a different type of expense: dependent care. Money that you put into this account can be used to pay for daycare, babysitting or even adult care if you are claiming them as your dependent (like a parent that lives with you who you are financially responsible for). Estimate how much you’ll need for this during the year and you can pay for it tax-free! As with all these accounts be sure to know the rules (minimums, maximums and rollover amounts) and take that into consideration while you are estimating.
One more fun fact about this type of account is that usually, you can “opt in” when you have a qualifying life event (i.e. having a baby) so you may not have to figure this one out during open enrollment.
Has anyone else been reading your benefit manuals lately? What are you going to take advantage of this fall? Let us know in the comments!