Flexible Spending Accounts - How Much to Save?
During an employer's open enrollment period, employees are asked to determine how much of each paycheck they would like allocated to their FSA. The amount they choose will be a set amount, with equal deductions taken from each paycheck throughout the year. The only other opportunity to change the amount will be during a major life event (such as a marriage or birth of a child). Although the dollars will be deducted from a paycheck throughout the year, the entire yearly amount will be available for spending on day one of the new benefits period.
Most FSA plans will ask you to determine the annual amount that you plan to withhold for medical care expenses, health insurance premiums, and dependent care expenses. They will then divide that annual amount by the number of pay periods during the year, and that will be your deduction amount per paycheck.
Answering the question of how much to save is often done on the back of a napkin in the minutes while you are trying to submit your open enrollment paperwork. Don't let haste cause bad decisions. Here is one way to look at that question of how much to save in your FSA:
Perhaps the minimum that anyone should allocate to their FSA is the amount that they will spend on health insurance premiums. Given that less than 20% of employers cover the entire individual premium, and less than 5% cover a family premium, an employee likely has an out-of-pocket premium cost that can be paid for with pre-tax dollar through an FSA. Using an FSA to pay your premiums is a no-brainer, and in fact is often done automatically by your employer even before it comes time for you to start making choices about your FSA withhold.
After that, it makes sense for most people to cover at least part of their deductible amount with their FSA. For example, if you have a $250 yearly deductible, you may has well pay for it with your FSA funds. It doesn't take much of a medical or dental procedure to blow through that kind of deductible. Additionally, keep in mind that you are only using the deductible amount as a guide -- the actual dollars can be spent elsewhere if you so desire.
Once you've covered your premiums and deductible with pretax FSA money, it gets trickier. Are you a heavy user of medical care? Do you have a child on the way? Does your employer insurance cover your dental and vision? Do you plan to do a major procedure in the next year, such as orthodontia or LASIK? Your answer may vary from year to year, and it makes sense to give it some thought. Dont' forget about some of the lesser-known items covered by FSA, and see if they apply to you. The right answer will be different for everyone.
Finally, some will cover dependent care expenses with their FSA. You can use up to $5,000 per year of pre-tax FSA dollars to pay for the care of a child aged 13 or under, or a dependent adult who is unable to care for themselves. There are restrictions, such as the dependent care must enable to you work or look for work, and if you have your child in a daycare, it must meet certain requirements.
With all of these expenses, keep in mind that it is a "use-it-or-lose-it" account. Err slightly on the low side when estimate out-of-pocket care, so you don't get in a position of losing the money you saved.