FSA · Medical

The FSA Crystal BalI

It’s that time of year, again: benefit open enrollment.

What? It’s only September, you say? Don’t most benefit periods start at the beginning of the year?

Turns out, not always. The startup I work for just celebrated its fourth anniversary and the benefits calendar nearly coincides, running from October 1st to September 30th of the following year.

It’s a passive enrollment, meaning if I do nothing, almost everything stays the same.

Except my FSA contribution.

What is an FSA?

In brief, a flexible spending account, or FSA, allows me to set aside pre-tax money every paycheck to cover out-of-pocket medical-related expenses throughout the benefit year. When I pay an expense, I can then submit the expense for reimbursement.

Benefits include:

  • It’s pre-tax money. The max I can contribute for the year is $2,700, which means the max I can save in taxes is $749.25, or $2,700 * (22% federal tax + 5.75% VA state).
  • Even though contributions are spread over the year, I can spend 100% of the $2,700 on the first day of the benefit period.
  • While most of my medical expenses are covered by my insurance, things like copays, coinsurance, orthodontia, wisdom teeth, eye glasses, contacts, etc., can all be paid using my FSA.
  • If I leave my company during the year, but after I’ve exhausted my FSA balance, I walk away without having to pay the FSA money back. Instead, my previous employer eats the loss.
  • My plan allows me to rollover $500 to the next benefit year if I don’t spend it all.

Disadvantages include:

  • It’s use it or lose it. Yep, if you forecast incorrectly and contribute too much, it sucks.
  • It’s not portable. If I leave my employer, the funds go *poof*.
  • It’s immutable for the year. I make my election in September and live with that decision for the rest of the year.

Every benefit year I have to commit to my FSA contribution for that benefit year. It’s not passive, meaning that if I do nothing, my FSA contribution will fall to $0, making me lose on the tax savings.

Looking Into Last Year’s Crystal Ball

I don’t have a crystal ball that can tell me how much to put into my FSA account. I know, surprise. Maybe looking into the past benefit period can help?

During the benefit enrollment in September 2019, we knew that my second daughter would need orthodontia during the benefit year. We already had a quote from the orthodontist and treatment would start immediately after we got back from our family trip to Spain.

My dental plan covers orthodontia up to 50%. I knew that I could use my FSA to cover my portion of the $4,000 bill, or $2,000.

In addition, our oldest needed some wisdom teeth out before heading off to college. Another $500. And with eyeglasses and contacts and other typical dental expenses, we decided to contribute the max of $2,700.

So, how did our prediction do?

First, the orthodontia billing got weird. We were billed the full amount in mid January, even though visits would happen throughout the year. But our insurance would only pay a portion of the bill every quarter. To date, they’ve only paid half of their portion but I expect another EOB in a week before the quarter ends. The fourth, and presumably last, will be in the next benefits period. Thanks, insurance company.

Second, COVID-19 happened. Imagine my surprise in needing to pay five, separate $20 charges to cover dental PPE for each kid when they went to the dentist in August. Insurance doesn’t cover the charge, meaning an unexpected $100 expense for the year. 

Sidenote: $20 feels a little steep. And couldn’t the hygienist reuse the PPE between child 4 and child 5, who she saw immediately after? I doubt changing the PPE between the two would help prevent #4 from hypothetically infecting #5 when they already live in the same house!

Third, child #4 was complaining about headaches after she read for any amount of time. Turns out, she needs reading glasses. Hooray! She joins the other three members of our family that are optically challenged. Now, half of us are four-eye’d.

Fourth, child #5 had a stubborn tooth that didn’t want to come out, potentially causing problems with the adult tooth muscling it’s way in. Off to the pediatric dentist to get it extracted. Later, we find out that she’s an out-of-network dentist, even though the insurance covers annual checkups with her at 100%. WAT?

And then there were the usual, expected expenses. Here’s a breakdown:

Expense Amount
Orthodontia $1,518
Wisdom teeth extraction $460
Pediatric PPE $100
Unexpected dental $462
Optical (doctor, glasses, contacts, etc.) $313
Total $2,853

 

I call that a successful prediction, even with the unexpected hiccups. We’re expecting the orthodontia to have that one last payment, soon, but if it doesn’t, I’ll have just south of $400 that will rollover.

Welcome to the Future

In the next benefit period, I don’t expect to pay any new orthodontia bills or wisdom tooth extraction. I do expect the usual optical expenses and some unexpected dental expenses. And there’s the last orthodontia payment that will come after the benefit period. Total expected expenses is around $1,000. Given that we can rollover $500, it might make sense to goose it a little, maybe to $1,200. 

Can we kill the FSA already?!?

The FSA seems to be designed by a gambler. Use it or lose it? Make a one time prediction with no ability to add/remove from the “bet”?

And the crazy things people do at the end of the FSA period to spend that money so they don’t lose it. My FSA provider even preys on that fear with their own FSA-themed store and their emails warning me that “I could lose it all if I don’t spend it now! Click here and we’ll help spend so you don’t lose it!”

Seriously, can we kill the FSA?

I propose that we replace the FSA with a health savings account (HSA) that has the same contribution limit as the FSA for those not in a high-deductible health plan (HDHP). In a HDHP? Then you get the full HSA amount. Kill the “use it or lose it”, kill the non-portability, kill the make-a-choice-and-live-with-it immutability.

What am I missing? Will this idea create some sort of tax “black hole” that will destroy modern democracy as we know it and enslave generations to come?

Or maybe just get rid of the FSAs and HSAs altogether and stop giving what could arguably be called a tax subsidy for the medical industry. Does that idea make me a communist?

I’m sure MaxOutOfPocket has an opinion or two on my proposals. Love to hear your thoughts in the comments, below.

Hasta luego!

8 thoughts on “The FSA Crystal BalI

  1. I hate the use-it-or-lose-it nature of FSA’s as well.

    Isn’t the tax savings = $2700*(federal + state marginal tax rate), assuming your state allows you to deduct the contribution? I didn’t quite follow your math.

    I’m envious of your relatively low healthcare spending. ADHD + Asthma meds are running $450/month for me for 3 kids. It’s asinine.

    If the timing of orthodontia isn’t working out perfectly, can you simply prepay (or, more accurately, pay now for services performed in 2020 that haven’t passed the insurance bureaucracy processing hurdle yet)?

    1. My math was working backwards from “in order to spend $2,700 on medical expenses, I need to earn $3,461.54”. Wrong way to think about it?

      My workplace plan covers all of my out-of-pocket, in network medical expenses. But as a family, we spend a lot. The plan has a ~$6.5k individual deductible and a family deductible of twice that. We exhaust that every year.

      I don’t think you can prepay. It’s all about explanation of benefits from the insurance, in my experience. I’ve tried submitting just receipts and the FSA administrator always requests the EOB. I consider myself lucky that orthodontia gives me enough of a warning that I can anticipate it and use the FSA to pay for it. Ditto for wisdom teeth. If only dental caries and other stuff would give me a 12 month heads up. Or wait until the next election period.

      1. The FSA reduces, dollar for dollar, your taxable income (just like a HSA / trad 401k, etc). Consequently, it’s saving you $2700*(22% MTR Federal + 5.75% MTR State) = $749.25/year in taxes.

        You’re lucky that your employer covers your in-network expenses! That’s incredible!

        Bummer about not being able to prepay. If it were me, I think it’d be worth a shot to take the FSA-issued debit card to the orthodondist and explain the situation. “I need to pay for the 2020 services rendered by December 31 2020 or this money will evaporate on my FSA card. I cannot wait for the bureaucracy of insurance processing.” Maybe I’m horribly wrong and it’s a lost cause…..

        1. Okay. I was being too clever. Updated the math. Thanks for the correction.

          I’ll do a post about the coverage. I still have premiums that I pay, but I definitely agree that my company treats us well with the health plan.

          You may be able to work out something with the orthodontist. I haven’t needed to, but they do understand FSAs and they may be willing to bill it differently. However, in this case it’s not the orthodontist, but the insurance who is dragging out the payment process over four quarters.

          1. Like my fancy HSA, I believe you are also sheltered from FICA taxes, providing you with an additional $206.55 tax shelter.

            $2,700 X (22% MTR + 5.75% MTR STATE + 7.65% FICA = $955.80

            You are essentially getting a 35.4% discount on healthcare services.

            Woot.

          2. Great point! I believe the Social Security portion of FICA goes away once you breach the annual FICA/Social Security limit ($137,700 in 2020) and disappears altogether at FICA/SS Limit + FSA Annual Contribution, or $137,700 + $2,700 = $140,400. The Medicare portion of the FICA tax is uncapped, so upper-bound calculation ends up being:

            $2,700 X (22% MTR Federal + 5.75% MTR Virginia + 1.45% FICA/Medicare) + MAX($0, MIN($137,700 + $2,700 + other pretax payroll contributions (e.g. medical, dental, and vision insurance/etc.) – W2 Wages, $2,700)) X 6.2% FICA/Social Security

            I’m probably missing some other details, but I think it’s getting closer 🙂

  2. I definitely agree – kill the FSA. My HSA essentially takes care of all three disadvantages you listed.

    You should also know that the CARES act made over the counter (OTC) products and medication (including menstrual care products) qualified medical expenses. This is retro for all of 2020. I bought some Rolaids last week when I was moving Mrs. Max OOP to Calgary. I now have an ethical dilemma on how to treat the exchange rate because the receipt doesn’t say CAD vs. USD. I will probably do the right thing.

    I am also surprised they won’t let you pre-pay. Seems like you plan need to find something better to do then reconcile transactions back to an EOB.

    Hope you are well, hoping to get back into writing this fall.

    1. Thanks for the CARES tip. We exhausted the FSA this year but I’m building in padding to take cover more things like menstrual care and OTC products next year.

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