If you’re like most women, you’re always looking for ways to save money. One great way to do that is by taking advantage of a Flexible Spending Account (FSA). This account allows you to set aside pre-tax dollars to use for qualifying healthcare expenses. This can be a huge savings, especially if you have a high deductible health plan. However, there are some things you need to know before deciding if an FSA is right for you. In this blog post, we will explore the advantages and drawback and help you decide.
- FSAs can be great for lower income women or those who prefer HMOs
- HSAs might work better for higher income or self-employed women
- FSAs fall short for women – feminine products are now covered, but expensive items like diapers, formula, and therapy are not
What is an FSA?
A Flexible Spending Account is a pre-tax benefit account provided by your employer. It’s used to pay for eligible healthcare, dependent care, and commuter expenses. They are offered by employers as part of a benefits package and they are funded through payroll deductions. The money in your account can be used to pay for a wide variety of out-of-pocket healthcare expenses, including copays, deductibles, and coinsurance. Some can also be used to pay for dependent care expenses, such as daycare costs.
Why Does It Matter that FSAs are “Pre Tax”?
When you contribute money to an FSA, that contribution is made before taxes are taken out. That means the money in your FSA is not taxed.
Example! Let’s say you’re still a single lady, and you want to use a pre-loaded FSA card to buy some tampons, Aleve, and a bottle of wine at Walgreens. Your average tax rate is 22.4%. Since those FSA funds are pre-tax, it’s like having a 22.4% coupon for your tampons and Aleve.
Wine? Still full price.
What are the Benefits of an FSA?
There are several upsides:
– it can save you money on your taxes. The contributions you make to your account are pre-tax, which means you will pay less income tax on them.
– it can help you pay for out-of-pocket healthcare costs. The money in your account can be used to pay for copays, deductibles, and coinsurance. And tampons!
– it can be used to pay for dependent care expenses. This includes daycare costs and other qualifying expenses.
The One Big Disadvantage: Use It or Lose It!
The one big disadvantage is that the money in your account must be used by the end of the year. Any money that is not used by December 31st will be forfeited. For this reason, it’s important to only contribute as much as you think you will need.
Who is eligible for an FSA?
These are employer-provided benefits, so you must be employed by a company that offers the benefit. You need to sign up for it at open enrollment, and it’s not tied to your health insurance (here’s how to choose the right plan). It’s a separate benefit.
The federal government decides which expenses are eligible and sets a limit on how much you can contribute each year. The federally-allowed limit for 2022 is $2850.
How do FSAs compare to HSAs (Health Savings Account)?
Most employers only offer one, and HSAs are similar to FSAs in that they are pre-tax benefit accounts. However, there are some big differences:
No FSAs Self-employed Lady Bosses!
Self-employed people are not eligible for an FSA. However, we can open an HSA if they have a high deductible health plan.
No dependent care for HSAs
HSAs can only be used for qualifying healthcare expenses.
HSAs roll over
Unlike FSAs, you can carry over the money in your HSA from year to year. This means you can save it for future healthcare costs.
HSAs are AMAZING retirement accounts
HSAs can be used to save and invest for retirement! The money in your account can be withdrawn penalty-free at any time after you turn 59 ½.
Finally, when weighing this decision, the guaranteed maximum tax savings for an FSA is $729 in 2022 (The max effective tax rate X the $2850 limit), so here is a little strategy:
Pick a Flexible Spending Account If…
- You need extra $729 this year. If you need it you need it. For instance, you don’t have an emergency fund or you’re having a hard time paying monthly bills.
- You prefer an HMO healthcare plan. Some women LOVE HMOs, particularly when having babies, because the costs are relatively low and extremely predictable
Get the Most Out of Your Flex Spending Account
There are a few things you can do to make sure you get the most out of this strategy:
- First, only contribute as much as you think you will need. Remember, any money that is not used by December 31st will be forfeited.
- Second, try to use your FSA for predictable expenses. This will help you make sure you don’t run out of opportunities to spend it before the end of the year.
- Third, keep track of what you spend. This will help you plan for future years and make sure you’re getting the most out of your account.
Why is an FSA a great option for women? Child Care!
Two words women: Child care. Dependent Care FSAs lower your childcare costs. For dependent care, For the year 2022, you can put a maximum of $5,000 into your Dependent Care FSA if you are single or filing jointly. If you are married and filing separately, you can put a maximum of $2,500 into your Dependent Care FSA. You and your spouse can each contribute $2,500 to your own Dependent Care FSA, for a total of $5,000 (if you each have one through an employer.
Important note: this benefit is totally separate from the Child Care Tax Credit.
But… FSAs Fall Short for Women: Disallowed Expenses
Women recently won a victory in that tampons and other feminine hygiene supplies are now eligible. Yay?
But, a lot of mission-critical costs for moms are not eligible. According to the U.S. Department of Agriculture, it costs around $233,610 to raise a child from birth to age 17. Out of this total, health care accounts for about 9%, which doesn’t include major expenses for moms:
- Diapers & wipes (unless your child has a medical condition other than butt-exploding infancy)
- Infant Formula (but enjoy your tax free heated massage gun)
- Therapy (unless you go get a “Letter of Medical Necessity” from your doctor. Because depressed women need more hoops to jump through.
It can be a big disadvantage for women to pay for these types of products out-of-pocket.
Common FSA expenses women should Know
The hilarious thing about FSA regulation and maybe all tax law, is that it’s involved in your lady bits until the baby arrives. These items and services are eligible:
- Tampons, pads, and other feminine hygiene products
- Contraception, such as the pill, patches, vaginal rings, IUDs, and condoms
- Abortion, including Plan B and copays on abortion services
- OB/GYN, pregnancy and postpartum copays (See New Baby Financial 101)
- Breast pumps and breast milk storage bags (if you’re nursing)
- Fertility treatment payments
- Pregnancy tests and Prenatal vitamins
The Bottom Line: Is An FSA Right for Your Family?
No lie, the only thing I ever used my FSA benefit for was childcare. But mostly because I did not want to manage using it and my healthcare costs have not been that stable.
Women who index high on “organized” – this is a GREAT move for you.
However, if you have recurring, predictable health issues, its is a great way to get a discount (equivalent to your effective tax rate).
Finally, as I said above, I will always pick an HSA if I can afford to, but the right answer is what’s right for you.