Wednesday, October 19, 2011

What's Wrong With Flexible Spending Accounts

So if you don't know anything about what a flexible spending account is, here's a little breakdown.  A flexible spending account is an amount of money that is given to you and you are forced to pay back.  You set the amount of money that you want to receive and at the beginning of the year you receive a credit card with that amount of money on it.  The payback on the money is taken right out of your paycheck.  The payback is divided into 52 equal payments  or 26 biweekly payments or 12 equal payments so that it is paid back in one year.  Flexible spending accounts are  tied in with your insurance.  The only way to have a flexible spending account is to have insurance.  This is not a loan.  In a loan situation, a company gives you money, trusting that you"ll pay them back.  If you don't there is nothing that they can do to you.  They can't send you to jail and they can't garnish your wages.  They can't do anything except ding your credit score which can be damaging enough by itself.  This is not a loan in that you are forced to pay it since it is taken right out of your paycheck.  There is another reason that it is not a loan but we will get into that later.  Basically, the only way to default on a flexible spending account is to quit your job.  Finally a flexible spending account can only be used to cover the cost of medical treatments or dental treatments and to cover the cost of prescription medicine!

So that's the low down on a flexible spending account.  Sounds pretty good, right?  In some ways it's great.  Having a flexible spending account means that if you get sick and have to go to the doctor or you have a dental appt., you don't have to worry about having enough money to cover the cost because you already have the money with you on the flexible spending account.  Or if you get a prescription filled, you can use the flexible spending account to pay for your medicine!  Also money that you put on a flexible spending account cannot be taxed by the federal government.  So if you put $3000 on a felxible spending account, that money is not taxed!

So what's wrong with flexible spending accounts you ask?  Well several things.  For every one thing that sounds good one a flexible spending account, there is something that's bad about having a flexible spending account.  Let's see if you agree!

First would have to be the amount of money that you put on a flexible spending account.  Currently you can put up to $4000 dollars on a flexible spending account.  Starting in 2013, that amount will change from $4000 to $2500.  But that's not why I am complaining.  When I say the amount of money that's put on a flexible spending account is a problem, what I mean is that you have to "guess" on how much time your going to be sick this year.  How much your going to be a the doctor or how much your kids are going to be in the clinic or hospital.  How much time your going to be in the dentist.  Things like that.  My thing is, who in their right mind plans to be sick?  Who plans on going to the dentist expecting to have cavities?  Who plans on their kids breaking an arm?  Who plans like that?  I certainly don't and I hope that you don't either.  I don't think that there is anybody out there that plans to be unhealthy.  The truth is that you cannot plan on things happening.  It's like driving in a car and getting in a wreck.  Nobody plans to get involved in a wreck!  So basically you have to plan on getting sick and guess how much money your going to use that year.  Pretty much impossible.  If you don't put enough on a flexible spending account, you may have to start digging money out of your own pocket that you might not have.  This might get you into trouble in some cases.  On the other hand if you put too much on a flexible spending account and don't use it, well in that case your just going to lose it, which is my next topic.  Once you set the amount that you want to be put into the flexible spending account you cannot change it unless a qualifying event occurs such as the birth of a child or death of a spouse, etc.

Use it or lose it.  One major drawback is that the money must be spent within the coverage period as defined by the benefits plan coverage.  This can be different depending on the type of flexible spending account that you have.  There are several different types but for the most part, they are typically the same.  Some require that the money be used within 12 months while others give you a grace period.  The grace period usually is about 3 months but sometimes can be shorter.  Any money that is left unspent at the end of the coverage period is forfeited and can be applied to future plan administrative costs or can be equally allocated as taxable income among all plan participants.  This is why people call this the "Use it or Lose it" rule.  If you want to get technical, if you don't use some of the money and you lose it, they you are taxed on that money.  Basically you get taxed on money that you didn't have.  Let's say that you put $2000 on your flexible spending account.  They give you the $2000 at the beginning of the year.  You only use $1000 so you lose $1000.  Even though you paid $2000 back through payroll deductions, you still lose that money and then are taxed on the money that "they", the government, took back.  Doesn't make a whole lot of sense.  I'm not sure why you lose the money at all!  If you pay all the money back anyways, why do you lose that money if you don't spend it within a certain time frame?  You earned it, right?  They just gave it to you in advance, yet you are paying it all back with equal payments.  There is not a more devastating feeling than the government taking money away from you that you earned!  Well just one other which ties into my last topic.

Finally, a major drawback is where you spend the money.  The government has designated where you can spend the money that is on a flexible spending account.  The money that is on a flexible spending account must be spent on medical expenses, dental expenses, and prescription costs.  In certain cases it can be spent on things like childcare services.  Used to, you could spend the money on over the counter  medications but as of 2011, this feature has been taken away unless these over the counter medications are prescribed by your doctor of dentist.  However, I don't know of any doctor or dentist that prescribe over the counter medications.  This is the other reason that a flexible spending account is not a loan.  Unlike a loan, you cannot spend it wherever you want.  On a loan, you can spend the money where ever you want.  The only loans that you can't are a care loan or a house loan.

Audits.  This ties in with where you spend the money.  Anytime that you use the money, you are subject to an audit.  They can audit you every time you swipe the card, or they may never audit you at all.  It all up to "them".  What boggles me is why the government tells you where you can spend the money.  Especially when you earn it.  True that they give it to you at the beginning of the year, but if you pay it back then why does it matter where you spend the money?  It's your money and you earned it, yet the government tell you where to spend it!  In my opinion that's totally wrong!  Especially in a free country as we live in.  But that's government for you!

So tell me what you think?  Am I wrong or does what I'm saying have any merit to it at all?


Weatherford Mom said...

Respectfully, I think you are only somewhat informed on flexible spending accounts. Most people are unable to itemize their medical expenses on their tax return (regular trips to the dentist and occassional trips to the doctor simply don't total enough). In order for medical expenses to be deductible, they must total at least 7 1/2 percent of your AGI (adjusted gross income). Flexible spending accounts allow people with relatively low expenses (less than $5000 or so) to still get a Tax savings on those dollars.

A good rule of thumb is that this saves an employee at least 15-20 percent conservatively on their tax free contributions. If you have a kid in braces (an eligible expense) for $3000, you just saved between $450-600 in money you didn't have to give Uncle Sam on top of the expense (like you would normally do with your after-tax paycheck.

You are right that we can't predict the future, but most people can calculate a reasonable guess. My husband takes a prescription, I wear glasses that need to be replaced this year, and I hAve a kid in braces. These are eligible expenses and predictable ones. Don't be scared of the "use it or lose it" rule; just be cautious/conservative when you set your annual amount.

If you have a large expense coming up (exx: lasic eye sugery), you can commit your annual amount and use the money the very first day. It's like you've put yourself on a payment plan (payroll deductions) -- It's a tax free loan you made to yourself!

You mentioned the use it or lose it rule -- you are telling the IRS that you are using this money for medical related expenses so you are getting the money without paying tax on it. That's why they have to adjudicate claims. That's fair enough.

The government doesn't dictate where you can spend the money, just what the monies can be spent on.

Anyway, these are great programs. I wish that someone would have spent a little more time explaining these to you -- think you could be a fan! Understanding is key.

Thanks for letting me through in my two cents. Good luck.

Weatherford, TX

Weatherford Mom said...

Sorry, typed this from my Blackberry -- I see some errors. Please forgive...

Ryan Crouser said...

Mrs. Shana,

I understand what you are trying to say. I think that I am pretty informed on how FSA's work. I am on an FSA myself. Please understand that what I say is merely my own opinion, and mostly my opinion about my own personal experiences concerning FSA's.

I understand where your coming from about most of the stuff you wrote. I understand where you say that I'm telling the IRS that I am using the money for medical related expenses so I am getting the money without paying tax on it. I understand that. so maybe the government should designate where I spend my tax free money. On the other hand, I have a ton of money left on my FSA account that I am about to lose. My big problem is that if i lose it I will get taxed on it! If I am going to get taxed on something, should I be able to keep it...especially money? Especially if I earned it?

Also you said that "most people can calculate a reasonable guess" on how much money they will be spending on medial and dental and such. I'm not so sure that's true! While you can guess, because you have prescription, glasses, and braces, I have none of those! You can predict what you have, but what about what you can't predict? I can't predict anything because I don't have anything to predict! I have to take a guess on whether or not I am going to get sick this year. Same for my household! In my opinion, this is no way to have an FSA!

You said that the government doesn't dictate where you can spend the money, just what the monies can be spent on. Is that not the same thing? I guess I am not following you on this one! If they are telling us what our money can be spend on, isn't that telling us where we can spend our money? If they say we can't spend it at Academy, but only at a pharmacy, isn that not telling us where we can spend out money?

Anyways, like I said, like every blog out there, this is only my opinion! It's just based on the things that I see wrong with it! But thanks for commenting! I really appreciate it! It means a lot to me when people comment! I like to read them and I post every one of them! Good or bad!

Take care of yourself.