Fall is here, which means that it is time for the annual running of the workplace benefits gantlet. In all the rush to pick healthcare plans and sort out this HMO from that HSA, do not let your FSA get lost in the alphabet soup of offerings. That is a Flexible Spending Account, and it is a terrific – but often overlooked – tax break for anyone with regular medical expenses, from co-pays to eyeglasses.
A flexible spending account allows you to save up to $2,500 per person each year, before taxes. You set an annual total, and part of that money is deducted each week from your paycheck. As you go through the year and spend money on qualified medical expenses – which are everything from crutches to pregnancy tests – you file for reimbursement.
The savings come in the form of a tax break – none of the money you deposit in a flex account is taxable, so you are saving the equivalent of your marginal tax rate on both your federal and state taxes. For someone living in California, with household income at the U.S. median of $50,000 a year, a $2,000 flex account would cut more than $800 off your taxes, but your $38 weekly deposit would shrink your paycheck by less than $23.
There is one drawback to a flex account – the "use it or lose it" provision.