What Are the Strengths and Weaknesses of a Flexible Spending Account (FSA)?

Q: My company is considering instituting a Flexibleis not easy to swallow, at least getting a 40%
Spending Account (FSA) benefit. While it soundsdiscount is palatable. Often overlooked FSA items
good, what are the strengths and weaknesses ofinclude: insurance co-payments and deductibles, in
a FSA? Are there any special benefits to Newvitro fertilization, and physician-prescribed weight
Jersey residents?loss programs. There is no federal limit on
The Problem - Determining if an FSA is Beneficialcontributions to FSAs for URM costs.
New Jersey (NJ) ranks in the top 30% mostDependent Day Care (DDC) Costs
expensive states in the U.S. for health care costs.Two groups of dependents are permitted under
Healthcare costs are rising 8%-10% per year andDDC:
are likely to grow two to three times the rate of1) a dependent age 12 or under who entitles you
inflation for the foreseeable future. NJ ranks in theto a personal tax exemption and
top 20% most expensive states for child care for2) a spouse or other dependent that is physically
pre-schoolers. Employers are shifting more childor mentally unable to care for herself/himself.
care, healthcare and insurance costs to theQualifying expenses include: care outside of the
employees - forcing employees to evaluate FSA's.home, dependent care center and payments to
The Solution - Flexible Spending Accountrelatives (as long as they are not your
Imagine getting over a 40% discount on yourdependent). One often overlooked FSA item is
healthcare and child care costs. That is essentiallysummer day camp that is primarily custodial
what a FSA provides. Contributions to an FSA areversus educational. The federal limit on
made on a pretax basis and can be used to paycontributions to FSAs for DDC costs is $5,000
for Unreimbursed Medical (URM) and Dependentper year.
Day Care (DDC) costs.Use it or Lose It
Contributions avoid both federal income taxesTake the time to determine the qualifying
(top rate 35%) and Federal Insuranceexpenses you expect to incur throughout the
Contributions Act (FICA) tax of 7.65%. Employersyear when establishing your contribution amount.
also avoid paying FICA taxes on employeeOver estimate and your unused contributions will
contributions. The wonderful state of NJ is one ofbe forfeited if you do not utilize them by the end
the only states that assess a state income taxof your employer's plan year. Even if it means
on FSA contributions.running out to the pharmacy on New Years Eve
Unreimbursed Medical (URM) Coststo stock up on aspirin, do not let your hard
There are a wide range of items covered,earned money go to waste. With a change in
including: prescribed and over-the-counterlaws, starting in 2005, some employer plans allow
medication, eye glasses and contact lenses,for purchases through March 15th of the following
crutches and hearing aids, and nicotine patches.year.
We all know we should visit the dentist twiceAction Steps - Utilize Your FSA
year for a checkup.If your employer offers an FSA take the time to
Unfortunately, many employers offer modestestimate your URM and DDC costs and contribute
dental insurance plans, leaving employees withto your FSA. If your employer does not offer an
large out of pocket costs. Many dental insuranceFSA encourage them to consider one. Not only will
plans have $1,000 or $2,000 family limits andit be viewed as a valuable benefit to attract and
cover only "reasonable and customary" charges.retain employees, but it can also save the
In NJ, that could leave you paying $600 for aemployer taxes.
$1,000 procedure.The government realizes healthcare and
Dental examinations, cleanings and fillings are alldependent care costs are skyrocketing. Thus, it
covered medical costs through an FSA. Whilehas essentially given taxpayers a gift in the form
paying $600 out of pocket for a dental procedureof an FSA. Do not look a gift horse in the mouth.