Save 30-50% On Healthcare-Related Spending

If you’re really careful (and a bit of a masochist) you can save all your receipts throughout the year, add them all up, and stick them into your tax filing pipe and smoke ‘em. The only problem is that the federal government is fairly strict regarding what qualifies as a medical deduction, and worst of all the total must exceed 7.5% (last I heard) of your adjusted gross income.

Sure you can include travel costs, co-pays, prescriptions, certain medical procedures that aren’t covered by your insurance, conferences or education relating to a chronic illness that you suffer from, etc. But that’s a lot of work and you’ve got to hit that magic number BEFORE any of that effort pays off.

A much easier approach is to participate in your company’s Medical Flex Spending Account (FSA) program – hopefully they offer one. The gist of the program is that you specify a total dollar amount that you want to have withheld (pre-tax, of course) throughout the year. You submit receipts for spending on qualifying products and services, and they cut you a check from the balance of your FSA. There’s no need to exceed 7.5% of the square root of Nicaragua, just spend like you normally would and you get reimbursed with your own pre-tax money.

Depending on your income tax bracket, that can mean that you’re saving as much as 50% in tax on qualified spending. You’re simultaneously reducing your taxable income so you may end up dropping into a lower tax bracket if you were just over the limit.

What’s covered? Quite a bit, actually, though some of the coverage is stipulated by your employer. Most FSAs will cover such things as:

• Medical and dental co-payments and expenses (including visits to doctors, surgeons, neurologists, orthodontists, dermatologists, chiropractors, therapists, counselors, and others)
• Most medical-related expenses when not covered by your insurance (including x-rays, MRIs, CAT scans, etc.)
• Some elective surgery (usually including corrective laser eye surgery)
• Non-elective surgery for cosmetic reasons
• Out of pocket medical and dental expenses (products/services not covered by your insurance)
• False teeth
• Fertility treatment (when not covered by your health insurance)
• Prescription medication or co-payments for them
• Programs to help stop smoking
• Some drug-rehab programs
• Chiropractic visits
• Ambulance services
• Some long-term care facility expenses
• Birth control including surgical approaches
• Crutches, walkers, wheelchairs, etc.
• Glasses and contact lenses
• Guide dogs for the visually impaired
• Acupuncture
• Hearing aids and batteries
• Flu shots and other vaccinations or inoculations
• Some over the counter drugs – this is great because your health insurance is very unlikely to chip in on these expenses, but you’re saving money at the same rate you pay income tax

What’s the catch? There’s no catch, per se, but there are a few details that you should be aware of:

• Use it or lose it. If you don’t spend the balance of your account by the deadline, the money disappears. I believe your employer gets to keep it. For 2005 they extended the spending/submission deadline through March so there was some extra time to drain your account before losing what you had carefully saved.
• Limits on changing amounts. Your employer (or the government) may impose limitations on how often you can change the amount of money withheld at each paycheck. If you specify a large amount, you could end up wishing later that you had requested smaller withholdings.
• Spending is hard to predict. Sometimes you’ll know if there are big upcoming expenses for the year (e.g., the birth of a child or a root canal), but if you can’t update the amount of money withheld, you’ll end up paying for those things with post-tax money. Since the accounts generally run based on the calendar year, you may not know in time (to have money withheld) for a big expense. Even if you can change the amounts, you’ll have less time before the end of the year and withholdings sufficient to pay for a service or product may leave you with less money in each paycheck than it costs you to pay all your bills.
• Withholding limits. There may also be limits on the total amount that you (and your spouse) can have withheld in a given year. You’ll want to find out for sure, but the number $5,000 is ringing a bell for some reason.
• They’re employer specific. If you leave your employer, your FSA balance stays there. You’ll need to submit your reimbursement requests to them.
• No stockpiling. The IRS will stop you from exhausting your account’s balance by purchasing more drugs (prescription or OTC) than can or should be consumed in a given year. You’ll have to be a little more creative than that if you don’t want to lose your money.
• No carryover. If you had qualifying surgery during the previous calendar year (and you’re past the deadline for that year) and you’re still making payments, you can no longer use your FSA for those. Stated a different way, FSA can only be spent on services or products received or purchased with money withheld during the same calendar year.
• No early payout. Let’s say that you have a big medical expense at the beginning of the year that’s greater than your FSA balance. You won’t get an up-front payment for the full amount. The FSA will give you incremental payouts as quickly as funds become available through your withholdings.

If you really want to knock yourself out, check out http://www.bankrate.com/brm/itax/News/20001129b.asp which includes an even more comprehensive list than the one I provided above.

There’s no reason not to immediately check with your employer regarding Flex Spending Accounts. They’re a way to save 30-50% on your medical-related spending and it’s much easier than trying to collect and tabulate all that information when trying to file your taxes.

Here’s a quick tip: when you first start out and need to specify an annual amount to have withheld, err on the low side since it’s better to miss out on saving 30-50% than it is to face losing 100% of some amount you’re unable to spend.

Many people don’t take advantage of available FSAs, but that’s probably just because they’re unfamiliar with the programs. They’re a very wise way to stretch your hard-earned dollars a little further.