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Flexible spending accounts
Reduce Your Medical Bills
by Josh Wozman
If you have a flexible spending account where you work, you're not alone. These accounts have become a popular, tax-smart way for millions of eligible workers to save money by paying for some routine medical expenses, as well as doctor and hospital visits.
Flexible spending accounts allow employees to set aside a certain amount of each paycheck into an account in pretax dollars. During the year, participants have access to this account for reimbursement of medical expenses not covered by insurance, such as health insurance co-pays or necessary medical products.
Suppose you spend $3000 during the year on out-of-pocket health care costs. With a flexible spending account, if you are in the 28% tax bracket, using pretax dollars to pay those bills will save you more than $1150.
Sounds like a no-brainer? Not so fast. Even though 37 million Americans are eligible for flex spending accounts, just 18 percent or fewer than 7 million Americans actually participate.
Why such a low enrollment number in a plan that could give participants bigger tax savings and lower out-of-pocket medical costs?
As helpful as these accounts are, they have one big drawback: the "use-it-or-lose-it" requirement. Once the annual deadline expires, money left in the accounts is forfeited to the employer. Surprisingly, participants give back an aggregate of approximately $675 million every year. On average, employees forfeit more than $100 each year.
Flexible spending accounts are a great way to save for medical needs, but unfortunately, restrictions on their use and funding make them less popular than they could be. With fewer restrictions, they could become a powerful force for improving our health care system.
To address the "use-it-or-lose-it" requirement, earlier this year the Treasury Department has given employers the opportunity to extend the annual deadline for using 2005 FSA dollars from December 31, 2005 to March 15, 2006. This move was a step in the right direction for consumers because it defers the "use it or lose it" provision by giving employees the ability to rollover funds into the next year, and it allows participants to better manage their money.
Plan Ahead
Despite the Treasury Department's rule changes, only about half the countries largest employers plan to offer the extension this year, according to Deloitte Consulting. So, as the year ends, hundreds of thousands of American workers are scrambling to spend down their flexible spending accounts instead of forfeiting them.
Too often participants feel without options. That's why it makes good sense for participants in these accounts to plan ahead and think strategically about how they can use these dollars, especially now.
Kevin McCallum, a senior vice president with 1-800 CONTACTS, notes that medical spending account participants can make good use of their funds by purchasing long-term supplies of certain medical products, such as contact lenses. "On average, employees typically surrender more than $100 each year in flexible medical accounts," said McCallum. "With a little advanced planning, many consumers can spend this money wisely and prepare for expenses they might otherwise encounter next year. Contact lenses fall into this category."
Some companies offer incentives that encourage medical spending account participants to spend their remaining funds and get excellent values. For example, 1-800 CONTACTS offers rebates off a year's supply of contact lenses from a variety of the most popular brands. "Our rebates are a value-added service for our customers who seek savings in buying bulk quantity. It makes economical sense for our flex spending account customers to spend their money now, rather than losing it later." As the year winds down, plan participants can think ahead about how to use any remaining funds. If you are a contact lens wearer, you've got one very clear option.
Josh Wozman is the Assistant Vice President of Stearns Johnson Communications, a boutique Public Relations firm in San Francisco. Among the clients he represents is 1-800 Contacts - the world's largest contact lens store.
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