Celebrate the FSA

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.

Celebrate the FSA

Postby Bob's not my name » Sat Aug 18, 2012 9:39 am

The Health Flexible Spending Arrangement is both an exceptional tax break and an administrative hassle. Since Thursday was the final day for comments to the IRS on possible modification of the use-it-or-lose-it rule and we can now eagerly await what complifabulous entanglements are being woven by sweating bureaucrats laboring at the colossal Tax Code Loom, I thought the timing would be right for a few comments on how valuable a tax break the FSA is. I make no comment on other types of FSA (dependent care, etc), but such comments are welcome in your responses.

Since the possible modification is not pending legislation, I believe we are ok by the forum rules (“Proposed regulations that are directly related to investing may be discussed if and when they are published for public comments.”). In any case, it’s not my intent to start a debate on whether the modification is a good idea or not; rather, I argue below that the use-it-or-lose-it rule is a fairly toothless bogeyman. Please do refrain from any comments on the ACA, or the thread will get locked. It is what it is.

Huge discount

Since an FSA shelters your income from federal income tax, federal AGI-based credit phaseouts, AGI-based IRA eligibility phaseouts, state income tax, social security tax, and Medicare tax, it’s a terrific tax break. For many families, it can halve medical expenses. It can even make them entirely free. Consider the following example. It may seem contrived but it’s wholly possible, and not far off what my situation has been for the past few years.

A family with two students in college, one spouse covered by a 401k, and two incomes of $98,000 would, in the absence of an FSA, not be able to reduce their AGI below about $176,000 (assuming $3,000 of pre-tax health, dental, and disability insurance premiums). That AGI would place them in the AOTC phaseout, the Roth IRA phaseout, and the spousal TIRA phaseout.
  • Their nominal federal bracket would likely be 25%, possibly 32.5% if they hit the AMT.
  • The AOTC phaseout for two students would add another 25%.
  • Their state tax might be 8%, or effectively 6% considering that it’s deductible against federal (unless they fell in the AMT).
  • The spouse covered by an employer plan would miss out on $1,500 of Roth IRA contributions (a problem possibly but not necessarily overcome with a backdoor Roth).
  • The spouse not covered would miss out on $1,500 of deductible spousal TIRA contributions. This $1,500 above-the-line deduction would further reduce their tax bill since it avoids their 50% federal rate and their state tax.
A $3,000 FSA contribution would therefore save them $2,750 to $3,200 of immediate taxes, making the FSA contribution effectively free. Free medical care for everyone! Not really, of course. In reality, the government threatens to take away your $3,000 and then lets you keep it provided you spend it on medical expenses.

But wait, there’s more! The FSA contribution would also allow them to increase their tax-advantaged savings by $3,000.

Is the FSA a huge deal for everyone? No. If you’re young and healthy and have perfect vision and good teeth, it’s not going to do much for you. Also: we hate you.

New limit

So the FSA is a wonderful (and hassleful) thing, but starting next year there is a $2,500 limit (inflation adjusted) on contributions. If a family has access to two FSAs they can contribute a total of $5,000, but if they have access to only one their limit is $2,500. How significant is the new limit? It depends on the family. A family with teenagers can anticipate significant medical expenses like braces and wisdom teeth removal. A family like mine with poor vision can anticipate significant annual expenses in eyeglasses and contacts. And I’ve reached the age where my annual dental expenses are high and my trifocal lenses are very costly. For a number of years I have contributed more than $2,500 to my FSA but regretted contributing too little. For families the new limit could mean a few thousand dollars in extra taxes each year of the teenage years – $10,000 total in new tax burden is not unlikely.

Use-it-or-lose-it rule

So the FSA is a wonderful thing, but is it adequately exploited by our fellow Americans? I think not. Many fear the use-it-or-lose-it rule. Many bogleheads do. Their fear is, at least in part, irrational.

Let’s consider a family with a 42% marginal tax rate (federal income tax, SS tax, Medicare tax, state income tax, and an AGI-based phaseout such as the child tax credit phaseout). They expect $4,000 of medical expenses next year, but their guess might be off by $1,000 either way. How much should they contribute to their FSA -- $3,000 (minimum), $4,000 (best guess), or $5,000 (maximum)?

If they contribute $3,000 their total gross income consumed by medical expenses will be $3,000 (minimum scenario), $4,724 (best guess realized), or $6,448 (maximum scenario).

If they contribute $4,000 their total gross income consumed by medical expenses will be $4,000 (minimum scenario, $1,000 forfeited), $4,000 (best guess realized), or $5,724 (maximum scenario).

If they contribute $5,000 their total gross income consumed by medical expenses will be $5,000 across the board.

The best guess contribution is the biggest money saver across the bulk of the probability distribution. Only when actual medical expenses are below $3,580 does the best guess contribution spend more than the minimum guess contribution. At this level the $3,000 FSA contribution has to be augmented by $1,000 of gross income with $420 lost to taxes, which is exactly equivalent to contributing $4,000 to the FSA and forfeiting $420 to the use-it-or-lose-it rule.

This simple model ignores three key factors. One is that many medical expenses (eyeglasses, for example) can be accelerated to make use of residual funds or delayed to await the next year’s FSA fund. A second is that some plans (mine, for example) include a 2.5-month grace period, further facilitating FSA fund exhaustion and reducing the guessing burden. A third is that the probability distribution is limited on the low side (and not really at zero, per the eyeglasses example), but not on the high side – that is, a medical disaster is a long tail on the high side of the distribution. Bogleheads are cocoapuffs for vast emergency funds and towering life insurance coverage, but tend to dismiss the risk of disaster when making tax mitigation decisions (especially the Roth vs. traditional decision, but that’s been covered in another thread).

The use-it-or-lose-it rule is especially galling if you are laid off with little notice, because you may not have adequate time to spend your FSA funds. However, it works both ways, since if you’re quick on your feet you can spend your entire year’s FSA amount without actually contributing that much. Certainly folks in volatile industries or failing companies should be more conservative with their FSA commitments. But overall the layoff threat is a low probability event, and letting it be determinative is like forgoing a great ESPP plan because you’re afraid your employer’s stock is going to drop precipitously during every three-day waiting period – if your company stock is dropping that consistently you have a bigger issue to address than whether to invest in the ESPP.

Working with the new $2,500 limit

Since the timing some of my significant medical expenses (eyeglasses in particular) can be managed, and since my plan has a grace period, I intend to max out my FSA at the $2,500 limit every year. Notwithstanding my rational argument above on being aggressive with FSA contributions, my irrational mind must be winning every year, because I have never failed to use every dime of my FSA contributions, even when I was in a plan with no grace period. This year I have already exhausted my FSA.

If the use-it-lose-it rule is actually abandoned, it’s likely that most Americans should contribute the maximum every year, at least until they’ve built up whatever rolling surplus the new rules allow. Couples with low medical costs and access to two FSA’s, for example, will need to see how the carryover rules actually read. I’m all atwitter.
Last edited by Bob's not my name on Mon Dec 31, 2012 1:11 pm, edited 1 time in total.
Bob's not my name
 
Posts: 6813
Joined: Sun Nov 15, 2009 10:24 am

Re: Celebrate the FSA

Postby jojay » Sat Aug 18, 2012 9:47 am

Excellent commentary.
Any chance we could get you to run for something in DC?
jojay
 
Posts: 55
Joined: Sun Apr 29, 2012 12:09 pm

Re: Celebrate the FSA

Postby livesoft » Sat Aug 18, 2012 9:53 am

We made our FSA hassle-free by learning how to use it. Basically, we only used it for expenses not paid by insurance, but paid by us and showing up on our EOBs (explanation of benefits). Since the FSA was run by our insurance company, we just turned in EOBs and got reimbursed. Better yet was to use the FSA debit card for all co-pays, all prescriptions, all charges for eye-care like disposable contact lenses.

However with a HSA and HDHP I am no longer eligible for an FSA. But guess what! My spouse now has a new employer and they offer an FSA, we have both HSA and FSA.

PS: --political comment deleted--
Last edited by livesoft on Sat Aug 18, 2012 9:54 am, edited 1 time in total.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
livesoft
 
Posts: 32649
Joined: Thu Mar 01, 2007 9:00 pm

Re: Celebrate the FSA

Postby Bob's not my name » Sat Aug 18, 2012 9:54 am

Yes, I have run several races there. I did well in my age category but did not medal.
Bob's not my name
 
Posts: 6813
Joined: Sun Nov 15, 2009 10:24 am

Re: Celebrate the FSA

Postby Bob's not my name » Sat Aug 18, 2012 9:55 am

livesoft wrote:we have both HSA and FSA
Very nice.
Bob's not my name
 
Posts: 6813
Joined: Sun Nov 15, 2009 10:24 am

Re: Celebrate the FSA

Postby texasdiver » Sat Aug 18, 2012 10:02 am

My wife and I have been using FSA accounts for the past 5 years and there is definitely some extra work involved and some educated guessing in terms of projecting future medical costs. It is absolutely great if you know that you have some sort of elective surgery or procedure coming up (i.e. braces) that you can plan for by maximizing the FSA that year. We maximized both of our FSA accounts the year our daughter got braces and it was great to pay the bill in full in advance and let the FSA account slowly replenish. We also contribute to a cafeteria plan for dependent care. The main difference between the medical FSA and the dependent care FSA is that you can spend your medical FSA in advance whereas you can only spend what you have already contributed to your dependent care FSA. So you can't pay that preschool tuition a year in advance.

What we have been doing lately is contribute 1/2 to each FSA because they run on different plan years. My wife's is from July 1 to June 30 of each year and mine is from Oct 1 to Sept 30 of each year. What that means is that we apply the expenses to the plan that is going to expire first until it is tapped out and then to the other plan. That reduces the chance that we will leave unused money in any one plan. And it means that we have 2 chances each year to adjust the FSA amounts.

What I would like to explore next is how to integrate an FSA with a health savings account (HSA). Some of my wife's coworkers have established HSAs and pay their out of pocket medical expenses out of that while maintaining low cost high deductible medical insurance. Does anyone know of a good web site or article that explains how best to combine all of these different options in the most tax efficient and cost effective manner?
texasdiver
 
Posts: 873
Joined: Thu Jun 25, 2009 1:50 am

Re: Celebrate the FSA

Postby texasdiver » Sat Aug 18, 2012 10:07 am

livesoft wrote:We made our FSA hassle-free by learning how to use it. Basically, we only used it for expenses not paid by insurance, but paid by us and showing up on our EOBs (explanation of benefits). Since the FSA was run by our insurance company, we just turned in EOBs and got reimbursed. Better yet was to use the FSA debit card for all co-pays, all prescriptions, all charges for eye-care like disposable contact lenses.

However with a HSA and HDHP I am no longer eligible for an FSA. But guess what! My spouse now has a new employer and they offer an FSA, we have both HSA and FSA.

PS: --political comment deleted--.


Is that the law or just a rule by your employer that says you can do one but not the other? I believe I am in your situation. Both of our employers offer FSAs. Can you recommend a good site to educate myself on the nuances of HSA and HDHPs?
texasdiver
 
Posts: 873
Joined: Thu Jun 25, 2009 1:50 am

Re: Celebrate the FSA

Postby livesoft » Sat Aug 18, 2012 10:09 am

That's the law. Please read http://www.irs.gov/pub/irs-pdf/p969.pdf
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
livesoft
 
Posts: 32649
Joined: Thu Mar 01, 2007 9:00 pm

Re: Celebrate the FSA

Postby Bob's not my name » Sat Aug 18, 2012 10:10 am

wiki wrote:If you contribute to a general-purpose FSA, you may not contribute to a Health Savings Account (HSA) even if you have an otherwise-qualifying High Deductible Health Plan. See IRS Pub. 969 - Qualifying for an HSA - Other employee health plans. (You may have a limited-purpose FSA which covers only dental and vision care, and still contribute to an HSA.)
Bob's not my name
 
Posts: 6813
Joined: Sun Nov 15, 2009 10:24 am

Re: Celebrate the FSA

Postby Muchtolearn » Sat Aug 18, 2012 11:03 am

Frankly, I found the FSA to be such a pain in the rear that after using it once, i decided heck with it. I'll forego the tax deductions. Every darned medical cost was a series of mailings and receipt gathering. Just wasn't worth it to me. I wish they would get rid of the whole thing frankly.
Muchtolearn
 
Posts: 1563
Joined: Sun Dec 25, 2011 11:41 am

Re: Celebrate the FSA

Postby livesoft » Sat Aug 18, 2012 11:08 am

^Yes, it was a pain the first year. But once you learn a few things, it becomes easy. Unfortunately, there is no book or pamphlet on how to make it easy. One has to learn from experience.

We got to the point where we submitted receipts just one time at the end of the year. We had a spreadsheet that followed the outline of the required form, so we put on the form "See attached" and that was that. But perhaps it was easy for me because I have great HR people at work that are very very helpful. :)
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
livesoft
 
Posts: 32649
Joined: Thu Mar 01, 2007 9:00 pm

Re: Celebrate the FSA

Postby texasdiver » Sat Aug 18, 2012 11:10 am

livesoft wrote:That's the law. Please read http://www.irs.gov/pub/irs-pdf/p969.pdf


I read through the IRS pub. It clearly indicates that an employee who is "covered" by a FSA cannot contribute to an HSA (page 4 second column). But I cannot find a definition of what is meant by "covered". If I have an FSA that can be used to cover my wife's expenses, does that mean she is "covered" by an FSA? Or is she covered by an FSA only if she has her own FSA? Clearly according to what livesoft is doing, it must be legal for one spouse to have an HSA while the other has an FSA but the rule appears ambiguous.

In any event, the best strategy for a couple with both HSA and FSA options available would seem to be the following.

1. Obtain a good HDHP (it appears I may have one available through my employer but my wife probably not) so we will have to see if it is possible to do via employer deduction or if we have find an outside plan.
2. First spouse opens and maximize the HSA (this money is like a 2nd IRA because it never expires and can be invested at will)
3. Second spouse opens a FSA and we pay all out of pocket medical expenses out of the FSA first and only touch the HSA when the FSA is exhausted.

What is not clear to me is whether the HSA and HDHP need to belong to the same spouse. Or whether one spouse open an HSA if the other spouse has the HDHP policy.



I will definitely have to do some more research because we are currently covered by my wife's plan and the enrollment period just renewed July 1. So we may be locked in for another 10 months before we can make any changes. At least I will have time to do some serious research.
texasdiver
 
Posts: 873
Joined: Thu Jun 25, 2009 1:50 am

Re: Celebrate the FSA

Postby Bob's not my name » Sat Aug 18, 2012 11:16 am

Muchtolearn wrote:Frankly, I found the FSA to be such a pain in the rear that after using it once, i decided heck with it. I'll forego the tax deductions. Every darned medical cost was a series of mailings and receipt gathering. Just wasn't worth it to me. I wish they would get rid of the whole thing frankly.
It can be a hassle, but in your state and bracket if you have $3,000 of medical expenses you will pay about $1,200 of avoidable taxes because you're not using an FSA. In your bracket $1,200 of net income is worth about $2,000 of gross income, so if you spent 20 hours a year on managing your FSA (it shouldn't be that much) you'd be making about $100/hour. But I understand it's not work you enjoy :) Maybe if you have a teenager you can pay him $600/year to manage the FSA for you and pocket the other $600.
Bob's not my name
 
Posts: 6813
Joined: Sun Nov 15, 2009 10:24 am

Re: Celebrate the FSA

Postby livesoft » Sat Aug 18, 2012 11:23 am

texasdiver wrote:Clearly according to what livesoft is doing, it must be legal for one spouse to have an HSA while the other has an FSA but the rule appears ambiguous.

Careful, I may be doing something illegal. :)

I can say that my HDHP is a family plan that now covers my kids and I. It no longer covers my spouse. My HSA is really for our future when I am fully retired. My spouse's new health insurance covers only herself. It appears that the FSA can cover anybody in the family, but we have not turned in any receipt nor been reimbursed for any expenses yet. It is possible that they reject claims unless they were incur directly by my spouse. For example, they may not take an EOB from my health insurance with "patient owes" as a legitimate expense. I'll post in this thread when we have more clarity.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
livesoft
 
Posts: 32649
Joined: Thu Mar 01, 2007 9:00 pm

Re: Celebrate the FSA

Postby texasdiver » Sat Aug 18, 2012 11:23 am

livesoft wrote:^Yes, it was a pain the first year. But once you learn a few things, it becomes easy. Unfortunately, there is no book or pamphlet on how to make it easy. One has to learn from experience.

We got to the point where we submitted receipts just one time at the end of the year. We had a spreadsheet that followed the outline of the required form, so we put on the form "See attached" and that was that. But perhaps it was easy for me because I have great HR people at work that are very very helpful. :)


Both my and my wife's cafeteria plan managers provide .pdf forms that are fillable and do the math so I need to type in the entries and the amounts total up for me.

My wife's health insurance policy also has an online account access where I can bring up a year to date summary of all of our medical claims and out of pocket expenses and pull up a .PDF of each EOB. Generally we are pretty conservative about how much we contribute to the FSA accounts so we can usually easily use up the FSA just by submitting a stack of insurance EOBs and we don't have to cobble together a bunch of other receipts for other health related spending.

If you have a stack of insurance EOBs to work off of it usually isn't much trouble.
texasdiver
 
Posts: 873
Joined: Thu Jun 25, 2009 1:50 am

Re: Celebrate the FSA

Postby tfb » Sat Aug 18, 2012 5:54 pm

livesoft wrote:
texasdiver wrote:Clearly according to what livesoft is doing, it must be legal for one spouse to have an HSA while the other has an FSA but the rule appears ambiguous.

Careful, I may be doing something illegal. :)

I can say that my HDHP is a family plan that now covers my kids and I. It no longer covers my spouse. My HSA is really for our future when I am fully retired. My spouse's new health insurance covers only herself. It appears that the FSA can cover anybody in the family, but we have not turned in any receipt nor been reimbursed for any expenses yet.

It's illegal but it's hard to catch. Because your HSA can also pay your spouse's medical expenses whether she's covered by your insurance or not, she can't double-dip with another FSA. She can only have a limited purpose FSA that covers only dental and vision. Of course her employer doesn't know you have a HSA and your employer doesn't know she has a FSA. Even the IRS doesn't know she has a FSA let alone what type because FSA doesn't show up on any tax forms. Still, I suggest you go clean and use a limited purpose FSA instead of a general purpose FSA.
Harry Sit, taking a break from the forums.
User avatar
tfb
 
Posts: 6675
Joined: Mon Feb 19, 2007 6:46 pm

Re: Celebrate the FSA

Postby Jerilynn » Sun Aug 19, 2012 2:04 am

I make no comment on other types of FSA (dependent care, etc), but such comments are welcome in your responses.


We used it when our 2 children were very young and in day care. It was great. We were subject to the use it or lose it provision, but it was pretty easy to calculate how much the day care expenses would be.

We did the medical FSA for a few years, but it was kinda a hassle and we didn't have very many medical expenses, so we ditched it.
Cordially, Jeri . . . 100% all natural asset allocation. (no supernatural methods used)
User avatar
Jerilynn
 
Posts: 1940
Joined: Tue Sep 06, 2011 1:49 pm
Location: USA, Earth

Re: Celebrate the FSA

Postby xerty24 » Sun Aug 19, 2012 2:17 am

I planned ahead and have always been on the winning side of the "use it or lose it" equation. My ex employers haven't been so lucky.
No excuses, no regrets.
xerty24
 
Posts: 4830
Joined: Tue May 15, 2007 4:43 pm

Re: Celebrate the FSA

Postby hoppy08520 » Mon Aug 20, 2012 3:58 pm

For anyone interested, here's a news article from 08/13/2012 talking about this:

http://www.nationaljournal.com/healthca ... e-20120813

Speaking for myself, I was afraid to put too much in my FSA for fear of the "lose it" part. And I found the receipts and forms to be such a PITA, and the stress about rounding up enough receipts to not "lose it", that I just quit signing up.

Regardless of the how they rule on the use-it-or-lose-it, I will probably sign up again next year for a conservative amount and just grin and bear it. Thanks for reminder, Not-Bob, of how you shouldn't pass up this free lunch.
User avatar
hoppy08520
 
Posts: 1464
Joined: Sat Feb 18, 2012 12:36 pm

Re: Celebrate the FSA

Postby SteelyEyed » Mon Aug 20, 2012 4:48 pm

I'll throw in some appreciation for the Dependent Care FSA. Although it is a little less flexible than its Health Care cousin, the contribution limit is nice. Like many, our annual child care costs are significantly more than the contribution limit, so guessing how much to put in it is easy: max it every year!

Here is a lesson that I learned the hard way that applies to both the Dependent Care and Health Care FSAs: if one spouse earns more than the Social Security cap, then have the spouse with the lower income open the FSA. Otherwise, you lose the SS tax benefit.
User avatar
SteelyEyed
 
Posts: 210
Joined: Sun Jun 14, 2009 11:34 am

Re: Celebrate the FSA

Postby madbrain » Mon Aug 20, 2012 8:54 pm

I use the FSA a lot, but I wish I did not have to. I submit expenses by fax as soon as I have any receipt to submit so I don't forget it later. That is typically 1-3 times a month. Even if it's a $5 copay for a prescription I just got in the mail. It's hard to believe it costs the company less to process the claims than the value of some of them.

My California registered domestic partner is not covered by the FSA unfortunately, even though he is on my employer's coverage. Stupid federal law. Even more stupid is that Metlife keeps submitting claims for him, and UHC keeps paying them in violation of the law.

I can't wait for this thing to go away completely. I suspect medical costs will go down overall when it does.
madbrain
 
Posts: 2320
Joined: Thu Jun 09, 2011 6:06 pm
Location: San Jose, California

Re: Celebrate the FSA

Postby Ice-9 » Wed Aug 22, 2012 5:58 pm

No mailing or faxing for me. I've used FSA the last two years, and my employer has used two different companies to manage the FSA plan. BOTH allowed scanning and uploading of receipts for claims on their websites, very similar to the online banks that allow uploading of scanned checks for deposit. Combined with direct deposit into my savings account, easy peasy lemon squeezy.
User avatar
Ice-9
 
Posts: 862
Joined: Wed Oct 15, 2008 1:40 pm
Location: Rockville, MD

Re: Celebrate the FSA

Postby interplanetjanet » Wed Aug 22, 2012 6:04 pm

I've used (and maxed out) both healthcare and dependant care FSAs for several years now. They have been a useful way to shield money from taxation for me. I have a child with special medical needs and unfortunately have no problem going through $5k/yr of medical expenses, predictably...the upcoming $2500 healthcare FSA limit will sting.

I've learned over the years that when I get buried in paperwork, I am less and less likely to face it. I've gotten into the habit of throwing all of the EOBs from my insurance company into a pile, and once every week I go through them and fax them off. It would probably take me less time in total if I did them all at the end of the year, but I like having it done and the money in hand well before then.

One "trick" I do is to pay my mother in-law for childcare using a depcare FSA. Then, as her (household) employer, I offer her a healthcare FSA with the money I pay her (she's older and retired with significant medical expenses). The net effect is that I get to pass income, untaxed, all the way from my gross pay to her medical expenses. I do end up paying some taxes (unemployment and state mandated disability insurances) but those are small compared with income taxes for me and FICA for her. My youngest is turning 13 next year, though, so I only get to do this for one more year. Oh well!

-janet
User avatar
interplanetjanet
 
Posts: 2177
Joined: Mon Jan 24, 2011 5:52 pm
Location: the wilds of central California

Re: Celebrate the FSA

Postby texasdiver » Wed Aug 22, 2012 9:39 pm

SteelyEyed wrote:I'll throw in some appreciation for the Dependent Care FSA. Although it is a little less flexible than its Health Care cousin, the contribution limit is nice. Like many, our annual child care costs are significantly more than the contribution limit, so guessing how much to put in it is easy: max it every year!

Here is a lesson that I learned the hard way that applies to both the Dependent Care and Health Care FSAs: if one spouse earns more than the Social Security cap, then have the spouse with the lower income open the FSA. Otherwise, you lose the SS tax benefit.


What do you mean? Can you elaborate on this last point?
texasdiver
 
Posts: 873
Joined: Thu Jun 25, 2009 1:50 am

Re: Celebrate the FSA

Postby livesoft » Wed Aug 22, 2012 9:42 pm

FSA contributions are made pre-FICA, so they not only are not income-taxed, they are not taxed on FICA+medicare. Does that help explain it?
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
livesoft
 
Posts: 32649
Joined: Thu Mar 01, 2007 9:00 pm

Re: Celebrate the FSA

Postby SteelyEyed » Wed Aug 22, 2012 10:44 pm

texasdiver wrote:
SteelyEyed wrote:Here is a lesson that I learned the hard way that applies to both the Dependent Care and Health Care FSAs: if one spouse earns more than the Social Security cap, then have the spouse with the lower income open the FSA. Otherwise, you lose the SS tax benefit.


What do you mean? Can you elaborate on this last point?


In the case of 2012, you only pay SS tax on the first $110,100 dollars of individual income. Let's say that you make $120,000 and you max out the Dependent Care FSA with $5,000. That $5,000 is not taxed for SS, but you're still over the $110,000, so you end up paying the exact same amount in SS taxes ($110,100 x 4.2% = $4,624.20).

If your spouse only makes $90,000, that entire amount would normally be subject to SS tax ($90,000 x 4.2% = $3,780). Now, consider opening the FSA in your spouse's name. Only $85,000 is subject to SS tax ($85,000 x 4.2% = $3,570). He/she saves $210, whereas you saved nothing (as far as SS tax goes).

This also applies to the Health Care FSA and any other Section 125 amounts, such as health insurance premia, dental insurance premia, or HSA contributions if you have one of those. So, say that you max out the DCFSA, max out the HCFSA, and pay $3,000 per year in insurance through your company's 125 plan. That makes $11,000 that can be shielded from SS tax, for a savings of $462 ($682 if we were paying the normal 6.2% this year), but only if your individual income is less than $110,100. So, the lower-paid spouse should have all FSA's and insurance in his/her name (assuming that the insurance plan has comparable costs).
User avatar
SteelyEyed
 
Posts: 210
Joined: Sun Jun 14, 2009 11:34 am

Re: Celebrate the FSA

Postby 555 » Wed Oct 17, 2012 9:42 pm

One way to "stretch" an FSA is to get Dental and/or Vision insurance in your Cafeteria plan. If those insurances are worth it for you (otherwise you wouldn't get them) then you get to shelter more.
555
 
Posts: 4145
Joined: Thu Dec 24, 2009 8:21 am

Re: Celebrate the FSA

Postby Watty » Wed Oct 17, 2012 10:28 pm

FYI, many people don't know that there is a flip side to the "use it or lose it" rule.

That is if you have a lot of FSA elegible expenses early in the year then you leave your job, then you will be reimbursed for more than was collated. For example if somebody is has schedule $2,500 to be withheld for the FSA then has a major expense in January and maxes it out, then quits in February, then they will be reimbursed for the full $2,500 even though they only had a couple of hundred dollars withheld from their paycheck.


Pre-funding and risks incurred by the employee and employer

One consideration regarding medical FSAs is that the participating employee's entire annual contribution is available at the start of the plan year, commonly January 1, or after the first contribution to the FSA is received by the FSA vendor, depending on the plan. Therefore, if the employee experiences a qualifying event during the first period, the entire amount of the annual contribution can be claimed against the FSA benefits. If the employee is terminated, quits, or is unable to return to work, he or she does not have to repay the money to the employer.


http://en.wikipedia.org/wiki/Flexible_spending_account
User avatar
Watty
 
Posts: 4503
Joined: Wed Oct 10, 2007 4:55 pm

Re: Celebrate the FSA

Postby interplanetjanet » Wed Oct 17, 2012 10:43 pm

Watty wrote:FYI, many people don't know that there is a flip side to the "use it or lose it" rule.

That is if you have a lot of FSA elegible expenses early in the year then you leave your job, then you will be reimbursed for more than was collated. For example if somebody is has schedule $2,500 to be withheld for the FSA then has a major expense in January and maxes it out, then quits in February, then they will be reimbursed for the full $2,500 even though they only had a couple of hundred dollars withheld from their paycheck.

It's important to note that this is only true for medical FSAs. Dependant care and adoption FSAs (and all others I think, but am not sure) only allow you to take out money at the rate at which it is contributed.
User avatar
interplanetjanet
 
Posts: 2177
Joined: Mon Jan 24, 2011 5:52 pm
Location: the wilds of central California

Re: Celebrate the FSA

Postby rkhusky » Thu Oct 18, 2012 9:00 am

I am fortunate in that my FSA program allows linking to our insurance company, so copays, deductibles and disallowed expenses are automatically paid via direct deposit. The only time we have to fax in receipts is when we don't go through insurance.
rkhusky
 
Posts: 1523
Joined: Thu Aug 18, 2011 9:09 pm

Re: Celebrate the FSA

Postby Bob's not my name » Thu Oct 18, 2012 9:23 am

rkhusky wrote:I am fortunate in that my FSA program allows linking to our insurance company, so copays, deductibles and disallowed expenses are automatically paid via direct deposit. The only time we have to fax in receipts is when we don't go through insurance.
That's a good system, but it breaks down under the ACA, which provides insurance coverage but not FSA eligibility for non-dependent children. I am in this situation now. The amount of paperwork flowing back and forth between me and my non-dependent kids living in other cities is ridiculous, but there are thousands of dollars to be saved every year, so the hourly wage is good.
Bob's not my name
 
Posts: 6813
Joined: Sun Nov 15, 2009 10:24 am

Re: Celebrate the FSA

Postby tfb » Thu Oct 18, 2012 9:40 am

Bob's not my name wrote:
rkhusky wrote:I am fortunate in that my FSA program allows linking to our insurance company, so copays, deductibles and disallowed expenses are automatically paid via direct deposit. The only time we have to fax in receipts is when we don't go through insurance.
That's a good system, but it breaks down under the ACA, which provides insurance coverage but not FSA eligibility for non-dependent children. I am in this situation now. The amount of paperwork flowing back and forth between me and my non-dependent kids living in other cities is ridiculous, but there are thousands of dollars to be saved every year, so the hourly wage is good.

In other words, when parent covers non-dependent kids but kids must claim deductible, copay and coinsurance from their own FSA, kids need the EOBs from the parent. Many insurance companies offer EOBs online. Can you just give the kid the login? Or download the EOBs and email?
Harry Sit, taking a break from the forums.
User avatar
tfb
 
Posts: 6675
Joined: Mon Feb 19, 2007 6:46 pm

Re: Celebrate the FSA

Postby Bob's not my name » Thu Oct 18, 2012 10:29 am

Probably in most cases. I was using the "paperwork" term non-literally. It's all the reconciliation that's tedious, especially since provider invoices often don't match to insurance EOBs.
Bob's not my name
 
Posts: 6813
Joined: Sun Nov 15, 2009 10:24 am

Re: Celebrate the FSA

Postby madbrain » Thu Oct 18, 2012 8:43 pm

Bob's not my name wrote:
rkhusky wrote:I am fortunate in that my FSA program allows linking to our insurance company, so copays, deductibles and disallowed expenses are automatically paid via direct deposit. The only time we have to fax in receipts is when we don't go through insurance.
That's a good system, but it breaks down under the ACA, which provides insurance coverage but not FSA eligibility for non-dependent children. I am in this situation now. The amount of paperwork flowing back and forth between me and my non-dependent kids living in other cities is ridiculous, but there are thousands of dollars to be saved every year, so the hourly wage is good.


It's not just the ACA. Due to the 1996 federal DOMA and California prop 8, my domestic partner healthcare expenses are disallowed from the FSA . But he is on my employer healthcare plan.
I have to submit everything to the FSA for myself. Much of the time it goes back and forth with them as they try to disallow even legit expenses. A lot of expenses that were eligible in previous years such as OTC no longer are either. Even with some doctor prescriptions I have still been hitting brick walls on many occasions. It is really getting to be hardly worth the trouble at this point. If the FSA was eliminated altogether, I wouldn't shed any tears.
There is no annual deductible involved for us, the only money to be saved is the tax break on my own copay and out of network expenses and the total tax savings are only about $500 with my current $1500 FSA contribution.
madbrain
 
Posts: 2320
Joined: Thu Jun 09, 2011 6:06 pm
Location: San Jose, California

Re: Celebrate the FSA

Postby mikep » Thu Oct 18, 2012 9:17 pm

SteelyEyed wrote:
texasdiver wrote:
SteelyEyed wrote:Here is a lesson that I learned the hard way that applies to both the Dependent Care and Health Care FSAs: if one spouse earns more than the Social Security cap, then have the spouse with the lower income open the FSA. Otherwise, you lose the SS tax benefit.


What do you mean? Can you elaborate on this last point?


In the case of 2012, you only pay SS tax on the first $110,100 dollars of individual income. Let's say that you make $120,000 and you max out the Dependent Care FSA with $5,000. That $5,000 is not taxed for SS, but you're still over the $110,000, so you end up paying the exact same amount in SS taxes ($110,100 x 4.2% = $4,624.20).

If your spouse only makes $90,000, that entire amount would normally be subject to SS tax ($90,000 x 4.2% = $3,780). Now, consider opening the FSA in your spouse's name. Only $85,000 is subject to SS tax ($85,000 x 4.2% = $3,570). He/she saves $210, whereas you saved nothing (as far as SS tax goes).

This also applies to the Health Care FSA and any other Section 125 amounts, such as health insurance premia, dental insurance premia, or HSA contributions if you have one of those. So, say that you max out the DCFSA, max out the HCFSA, and pay $3,000 per year in insurance through your company's 125 plan. That makes $11,000 that can be shielded from SS tax, for a savings of $462 ($682 if we were paying the normal 6.2% this year), but only if your individual income is less than $110,100. So, the lower-paid spouse should have all FSA's and insurance in his/her name (assuming that the insurance plan has comparable costs).


My wife is self employed but I have the HDHP plan through my day job. I'm wondering if we can open a section 125 with her business and she can contribute the family limit next year of 6450 to her own HSA pre-double SS/medicare tax combined with the HDHP through my employer? This would save us 15.3% self employment tax vs 1.45% medicare tax for me since I am over the FICA limit. But it removes business income that would otherwise be eligible for solo 401k, so maybe not a good idea until we can max both through her business. Thoughts?
mikep
 
Posts: 3072
Joined: Wed Apr 22, 2009 10:27 pm

Re: Celebrate the FSA

Postby interplanetjanet » Thu Oct 18, 2012 9:29 pm

madbrain wrote:I have to submit everything to the FSA for myself. Much of the time it goes back and forth with them as they try to disallow even legit expenses. A lot of expenses that were eligible in previous years such as OTC no longer are either. Even with some doctor prescriptions I have still been hitting brick walls on many occasions. It is really getting to be hardly worth the trouble at this point. If the FSA was eliminated altogether, I wouldn't shed any tears.

You have my sympathies, I've tilted against the same windmills. At this point, I only submit EOBs from my insurance company. Every other type of receipt I've submitted has been rejected out of hand at times, even those that have all the required information included.

There is no annual deductible involved for us, the only money to be saved is the tax break on my own copay and out of network expenses and the total tax savings are only about $500 with my current $1500 FSA contribution.

I'd have a bit of trouble going through a mountain of paperwork for that benefit if that's all you're getting. My FSAs have been saving me around $4500/yr, though the paperwork involved for some of this is extensive (household employment) I deem it still worth it. Next year it will be more like $3300, and then $1100-1200 after that. It was nice while it lasted.
User avatar
interplanetjanet
 
Posts: 2177
Joined: Mon Jan 24, 2011 5:52 pm
Location: the wilds of central California

Re: Celebrate the FSA

Postby Bob's not my name » Fri Oct 19, 2012 4:00 am

madbrain wrote:Due to the 1996 federal DOMA and California prop 8, my domestic partner healthcare expenses are disallowed from the FSA .
That's another example of FSA-insurance mismatch that must be pretty common. Would federal law change be sufficient to eliminate that, or is the prohibition redundantly imposed by California prop 8?
Bob's not my name
 
Posts: 6813
Joined: Sun Nov 15, 2009 10:24 am

Re: Celebrate the FSA

Postby NateW » Fri Oct 19, 2012 7:32 am

Don't pass this one up if you are offerted it. I am a big advocate of them. Back in the late '80s I worked for a trade association that had one (must have been around when they began) and my first wife and I had a young son and I maxed out the child care provisions and had a little put aside for medical expenses and it saved us a lot. I made very little money then.

My wife has a FSA through her employer. It can be a hassle, but once you learn the system, the perticular administrator's rules and how to file, its pretty easy. As for estimating your medical expenses, don't go overboard. We estimate conservativly and have never had any forfitied funds. We fall short every year in funds set aside. Just discovered my wife's insurance co-pay for an emergency room visit (broke her foot) is $300 :oops: (we are on our own insurance plans through our employers since its the least costly option). Start with your known expenses for the upcoming year (glasses next year, two dental check-ups, dr. check ups, etc.) and then we add a small additional amount. If you have daycare, its pretty easy to estimate what your expenses will be. Remember, if you forfiet money due to estimating expenses too high, you may end up not saving anything at all, or worse. We both get a Visa (debit card possibly) from the plan and when we have qualifying expenses that take CCs, we pay with that and when we write checks (I see one Dr. who likes them), I upload a claim and proof of payment to the FSA administrator's web site. The plan does direct deposit to pay claims.

One hassle we have sometimes is that since full documentation of expenses is needed, we are asked to submit additional proof about half the time we use the credit card for payment. Sometimes this necessitates a visit to the Dr.'s office to get it! After you figure that out, you ask ahead of time for the receipt WITH the diagnostic code. This was even when paying an ENT (specialist).

I do feel bad for the small employer employees that don't have FSAs. My boss won't even consider an FSA; we are a three-person office. (He's the one that set up a 2% ER 401k too :x ) It seems they are only offered by the larger companies. It is too bad that you can not set one up has an individual if your employer does not offer one.

--Nate
Last edited by NateW on Fri Oct 19, 2012 7:56 am, edited 2 times in total.
NateW
 
Posts: 448
Joined: Tue Feb 23, 2010 12:44 pm

Re: Celebrate the FSA

Postby NateW » Fri Oct 19, 2012 7:53 am

One other thing I did not see mentioned yet. You ARE supposed to keep ALL documentation submitted to an FSA for as long as you are required to keep your tax returns in case of an IRS audit. I did not know about this and read it recently on something from my wife's FSA plan. I have not been keeping the receipts and submission documents past the point she was reimbursed. I can't imagine the IRS ever auditing someone. The claim amounts don't even appear on your tax returns.

--Nate
NateW
 
Posts: 448
Joined: Tue Feb 23, 2010 12:44 pm

Re: Celebrate the FSA

Postby rkhusky » Fri Oct 19, 2012 8:32 am

If funds are forfeited, do they go to the administrator of the program? That's the only way that I can see that they get paid. If so, that might explain their incentive to deny claims.
rkhusky
 
Posts: 1523
Joined: Thu Aug 18, 2011 9:09 pm

Re: Celebrate the FSA

Postby Bob's not my name » Fri Oct 19, 2012 8:49 am

NateW wrote:As for estimating your medical expenses, don't go overboard. We estimate conservatively and have never had any forfeited funds. We fall short every year in funds set aside.
In the OP I argue for NOT being conservative. What's your counterargument?
Bob's not my name
 
Posts: 6813
Joined: Sun Nov 15, 2009 10:24 am

Re: Celebrate the FSA

Postby madbrain » Fri Oct 19, 2012 6:14 pm

Bob's not my name wrote:
madbrain wrote:Due to the 1996 federal DOMA and California prop 8, my domestic partner healthcare expenses are disallowed from the FSA .
That's another example of FSA-insurance mismatch that must be pretty common. Would federal law change be sufficient to eliminate that, or is the prohibition redundantly imposed by California prop 8?


Prop 8 prevents us from getting married in California, and the federal DOMA prevents federal recognition of any same-sex marriage in any state, thus making same-sex spouses ineligible for FSA.

At this time we are registered domestic partners in California, which gives us almost all of the state rights of marriage, but not the name. But the name is important when it comes to federal rights - there is no federal recognition of "domestic partners". So if the federal DOMA alone changes, my partner would still not become automatically eligible for FSA.

However, with this change, we could get married in one of the other states that allows it, or even in another country that does, and at that point, the federal government would then have to recognize my husband as eligible for FSA.

Of course we would prefer to be able to get married in the state we live in, and recognized by the federal government we pay taxes to.
madbrain
 
Posts: 2320
Joined: Thu Jun 09, 2011 6:06 pm
Location: San Jose, California

Re: Celebrate the FSA

Postby Bob's not my name » Fri Oct 19, 2012 6:30 pm

Thanks for the explanation. I suspected, but did not know for sure, that the federal government could do a lot on this issue, independent of state action. I live in a small state, so my friends in your situation don't have to go very far at all.
Bob's not my name
 
Posts: 6813
Joined: Sun Nov 15, 2009 10:24 am

Re: Celebrate the FSA

Postby madbrain » Fri Oct 19, 2012 7:22 pm

Bob's not my name wrote:Thanks for the explanation. I suspected, but did not know for sure, that the federal government could do a lot on this issue, independent of state action. I live in a small state, so my friends in your situation don't have to go very far at all.


Right, we know we could get married in another state (or country), but this would not bring any additional benefit to us. Out-of-state same-sex marriages are recognized as domestic partnerships in California.

Marrying in another state mainly helps those who live in states that disallow same-sex marriage and don't have a domestic partnership or civil union statute, but still recognize out-of-state same-sex marriages.

Regardless of what states do, until the federal government starts recognizing same-sex marriage (ie. DOMA section 3 is struck down), the situation for FSAs and same-sex spouses will not change.
madbrain
 
Posts: 2320
Joined: Thu Jun 09, 2011 6:06 pm
Location: San Jose, California

Re: Celebrate the FSA

Postby letsgobobby » Fri Oct 19, 2012 10:54 pm

So... How does one deem an FSA as a limited purpose FSA?
letsgobobby
 
Posts: 6843
Joined: Fri Sep 18, 2009 2:10 am

Re: Celebrate the FSA

Postby RebusCannébus » Sat Oct 20, 2012 12:49 am

Solution to the over-withholding issue: Become mentally unstable and needful of expensive and unreimbursed-by-insurance psychotherapy. Ate up my $10K every year no problem. WIth the new $2500 limit, I may be forced to seek alternatives. Ah, well.

As for
You have my sympathies, I've tilted against the same windmills. At this point, I only submit EOBs from my insurance company. Every other type of receipt I've submitted has been rejected out of hand at times, even those that have all the required information included.


for some reason, never had that --or any other-- problem. Except perhaps when, in my medication-addled state, I forgot to sign a reimbursement claim form.
Peter
RebusCannébus
 
Posts: 79
Joined: Sun Jan 02, 2011 2:34 pm

Re: Celebrate the FSA

Postby Bob's not my name » Sat Nov 10, 2012 8:14 am

Just found out I'll have a $700 out-of-pocket expense for dental work. My 2012 FSA is already depleted so I put off the work until Jan 4 so I can use my 2013 FSA. Problem is, I'll use 30% of my FSA before the year is a week old. I'm beginning to see how the use-it-or-lose-it rule becomes moot with a $2,500 limit.
Bob's not my name
 
Posts: 6813
Joined: Sun Nov 15, 2009 10:24 am

Re: Celebrate the FSA

Postby Hub » Sat Nov 10, 2012 9:58 am

letsgobobby wrote:So... How does one deem an FSA as a limited purpose FSA?
I have the same question. There's no distinction at my employer so I assume it's just an automatic thing if you enroll in an FSA and an HSA at the same time. Assume.
User avatar
Hub
 
Posts: 275
Joined: Fri Jul 13, 2012 9:56 am

Re: Celebrate the FSA

Postby grabiner » Sat Nov 10, 2012 10:05 pm

letsgobobby wrote:So... How does one deem an FSA as a limited purpose FSA?


Since the FSA must be administered by your employer, you need your employer to give the option.

When my employer first offered high-deductible health plans, it didn't offer limited-purpose FSAs, and at the time, the HSA contribution was limited to the deductible on the HDHP. In November, I knew that I would have dental work that would cost more than my deductible, and I scheduled the dental work for January with an estimated cost from my dentist. I got an HDHP with a Health Reimbursement Agreement for the employer contribution (as I was ineligible for an HSA), and then contributed enough to the FSA to cover my dental work. This saved more in cash than contributing the maximum to the HSA would have saved, and it made all of my dental work tax-deductible.

My employer now offers limited-purpose FSAs, so if I were in the same situation again (knowing in November that I would have dental work in January), I would continue to max out the HSA and put enough to cover the dental work in the limited-purpose FSA.
David Grabiner
User avatar
grabiner
Advisory Board
 
Posts: 12776
Joined: Wed Feb 21, 2007 12:58 am
Location: Columbia, MD

Re: Celebrate the FSA

Postby SSSS » Sun Nov 11, 2012 12:27 am

I find it to be profoundly useless. It can no longer be used for over-the-counter medicine (at least, not without jumping through some unfeasible hoops). My company's health incentive program pays up to $800/year into a health reimbursement account, which always gets invoked before the FSA would get invoked. The reimbursement account funds never expire and I've never used the entire $800, so I've got quite a buffer built up.
User avatar
SSSS
 
Posts: 1866
Joined: Fri Jun 18, 2010 12:50 pm

Next

Return to Investing - Theory, News & General

Who is online

Users browsing this forum: Chan_va, Electron, eschaef, Ged, HighFive, Johno, Kevin M, Leif, lowerleisureclass, vesalius, yukonjack and 54 guests