Why FSAs are Worth It – Even for Low Income Earners

At open enrollment fairs and other events, my colleagues and I hear a lot of the same questions about benefit accounts. Here, I wanted to address this frequent one: “I don’t make that much. Is a Flexible Spending Account worth it?”

There is a myth that individuals in lower income brackets can’t afford to have anything else deducted from their paychecks and therefore they forgo having a Flexible Spending Account (FSA).

And brokers and enrollers often don’t rebut this at open enrollment. This is actually a perfect opportunity to address a very real problem for that very demographic.

With an FSA, you can pay for some items you are already buying and buy them as soon as you or your family needs them without having to save up or do without other things. Keep reading to see how.

As an account holder, an FSA helps you pay for things you likely already have to pay for, but now you get to do it tax free.

There are hundreds of eligible expenses for tax-free purchase with your health care FSA funds, including prescriptions, doctor’s office copays, health insurance deductibles, and coinsurance.

Many over-the-counter (OTC) treatments are also eligible, though keep in mind that many require a prescription, letter of medical necessity, or doctor’s directive.

Below is a quick list of some broad types of expenses that may be covered your FSA. See IRS Publication 502 for a complete list, or check out the ConnectYourCare Eligible Expenses page for an interactive list.

^* OTC items that contain a drug or medication require a prescription in order to be reimbursed. A “prescription” means a written or electronic order for a medicine or drug that meets the legal requirements of a prescription in the state where the medical expense is incurred, and the prescription must be issued by an individual who is legally authorized to issue a prescription in that state.

Keep in mind that employers can customize an FSA to modify eligible expenses further. Always consult with your Human Resources representative and/or a financial or tax advisor for advice specific to your FSA.

A health care FSA is also “worth it” to account holders because it gives them access to the entire annual amount elected beginning on the very first day of the plan year for medical, dental, & vision costs. (Please note: The IRS excludes this feature for dependent care.)

Let’s consider an example that takes expected annual out of pocket costs into account.

Let’s say you determine that you will have:

1. A $30 monthly prescription ($360/yr.)
2. $200 eyeglasses for your kiddo
3. $30 Copay for that nasty sinus infection you know you get every year

That is a total of $590 in known/expected out of pocket costs.

If you are in the 12% tax bracket, and you opt to have that $590 payroll deducted over the whole year, you have an extra $70 in your pocket because you don’t pay taxes out of your paycheck on that amount. And if the budget is already tight, every penny counts!

Perhaps even more meaningful, you have access to the whole $590 on the very first day of the plan year pre-loaded on a debit card. That $590 will be taken out of your paycheck over the course of the plan year.

This arrangement makes paying for anticipated expenses easier to do. In our example, that means it stings a little bit less when you have to pay for those glasses and when you pick up your prescription each month.

And if you end up not needing glasses (or any other out of pocket costs you originally expected), you can still use that money for other medical, dental, or vision expenses instead.

And, depending on the way your employer designs the plan, you may either have additional time at the tail end to incur expenses, called a grace period, or you may be able to rollover any unused balance up to $500.

See “What happens if I do not claim all the money in my account?” in our FSA FAQs for more details.

Hopefully that helps squash the myth that FSAs aren’t suitable solutions for individuals with lower incomes. An FSA provides account holders with a way to pay for many of the medical, dental, and vision expenses they can’t avoid with pre-tax funds, and provides participants with access to those funds at the beginning of the plan year.

If you already have an FSA and want to shop online for eligible expenses, visit our partner, FSAstore.com, to search their extensive selection of FSA-eligible items – especially if you need to spend down a large account balance prior to the end of your plan year.

If you’re an HR professional or benefits brokers, make sure you check out our FSA Administration page or contact a ConnectYourCare benefits expert to learn more about starting or improving upon an FSA for employees.