Our daughter Eve was born last month with a few medical conditions. They are not serious but required treatment that was also not cheap. This is how I became familiar with the workings of a Flexible Spending Account, or FSA.
Eve had tongue tie and upper lip tie as well as a condition called torticollis. The tongue and lip tie were treated with a procedure called CO2 laser tethered oral tissues surgery. It sounds awful but it was a 30-second procedure that has helped her tremendously. The torticollis is being treated with craniosacral therapy which is like a combination of baby massage and chiropractic.
Baby Eve has responded to these treatments beautifully and has now surpassed her birth weight to a whopping 8 pounds and 6 ounces! But this is the result of 3 weeks of treatment from specialists and nearly $2,000 in out-of-pocket costs. This is where the FSA comes in.
An FSA is like a bank account that holds your pre-tax dollars. You can use it to pay for out-of-pocket medical expenses such as copays, prescriptions, medical devices, and out-of-network procedures. An FSA can also be used for childcare expenses.
Now why would you do this? Because if you spend $2,000 per year on medical expenses, you have to make more than $2,000 to pay for that because: taxes. Let me illustrate.
Our tax rate is 33%. (Ugh!) My husband is the one with the full-time job around here so the FSA is with his employer. So if he makes $2,000, he cannot use the whole $2,000 to pay for medical bills. The government takes 33% of it so we are only left with $1,340. It order to pay that $2,000 medical bill, he will have to make $2,985.
Think about it! $2,000 in salary does not mean $2,000 to spend. You learned this lesson with your first paycheck. But with an FSA, $2,000 in salary DOES equal $2,000 to spend on approved expenses. So when given the chance to buy something with pre-tax dollars, you do it so that you have to work less to cover these life expenses.
Since we are in the 33% tax bracket, this is like getting a 33% discount on medical expenses for us. Take your tax bracket and apply the same discount.
The IRS allows each person contribute $2,550 per year to an FSA. If you are married, each spouse can have their own account. The catch is that you have to use that money each year or you lose it. Some employers allow flexibility and some don’t. My husband’s employer does not.
Your FSA works like a bank account. You get a debit card to pay your medical expenses. You track your spending online or with an app and once you blow through that money for the year, you’re done. The money gets into that account with regular deductions from your paycheck. Pre-tax of course.
Unfortunately we blew right through our FSA for the year in Eve’s first month of life. I only designated $1,000 into that account because I did not know we would have special medical needs. Fortunately open enrollment is in November so I can increase the amount in the account in just a few weeks.
So how do you know how much to put in an FSA? For a single person with no major health issues, $2,550 is probably too much. But most families with small children know what it is like to see their bank statements littered with pediatrician copays during flu season. So take the average of all the copays and prescription costs you have paid out of pocket in the last 2-3 years and pad it by a few hundred dollars. And if you are expecting a “life event” like the birth of a child, by all means max that account out! The out-of-pocket cost for giving birth is usually around $1,000 anyway. At least it is for us. Maybe less this time because I skipped the epidural. (Which had the ancillary benefit of making me think that I am INVINCIBLE after enduring the agony of natural childbirth! My poor husband.)
At $2,550, the FSA may seem like a small gimme from the IRS but it is still worth it. I’m grateful we opened it and even more grateful that the things we used it for have helped our little angel really start to thrive!
Disclaimer: I am not a certified financial professional. I just play one on TV. This blog is not to be confused with personal financial advice. It is my attempt to share with you what I have learned on my road to building my own family’s wealth. I hope you enjoy and learn from it!