Find out why you should be enrolling in your flexible spending account, and get answers to the three most common concerns.
They come with the promise of "free money," and they're a cinch to sign up for (just contact your employer's benefits department). But the vast majority of workers—as many as four out of five, according to a recent survey—pass up their company's flexible spending accounts (FSAs) mainly because they don't understand their tax benefits. And that's a shame: Although FSAs reduce your take-home pay, they save you money in the long term. Those pretax dollars can cover many out-of-pocket costs, including doctor visits, child care, and transportation expenses. Here are three of the most common worries about FSAs—and how to put them to rest.
"I Don't Know How Much to Contribute"
This quandary largely applies to medical FSAs. Chances are, you know approximately how much you'll spend on child care and commuting in an average year. But medical costs can fluctuate wildly, and unfortunately there's no easy way to predict them. So try this strategy: "Look at what you spent last year and withhold half of that, up to your plan's maximum," says Carolyn Goodwin of the National Association of Health Underwriters.
"I'm Afraid of Losing My Money"
It's a realistic worry. The funds you set aside typically expire at the end of the calendar year (or after 14½ months, if your plan offers a grace period)—meaning you must use the money or lose it. That's why, in mid-November, it's wise to check the balance in your medical FSA. If you have unused funds, go to FSAstore.com (which stocks only FSA-eligible items and services) and spend the remaining amount.
"It's a Pain to Get Reimbursed"
Yes, the accounts can have irritating requirements—like faxing in receipts and getting prescriptions for over-the-counter meds. But now it's easy to eliminate the paperwork, since more and more plan administrators offer a debit card that withdraws funds directly from your FSA when you make an applicable purchase.