Monday, July 7, 2008

Flexible Savings Account Mistakes... or what not to do with your FSA refund check

At my office we offer a Flexible Spending Plan for medical and dependent care expenses.* An FSA takes pre-tax money out of my paycheck and puts in an account for me. Then when I have medical expenses, I simply submit the receipts and I am reimbursed. Basically, my plan works like this:

At the end of the year I look at how much I spent in medical expenses. (I don't have dependents, so I only use it for medical expenses.) My plan covers things like the doctor and prescription co-pays that aren't covered by my insurance, over the counter drugs, and medical expenses I don't have insurance for - like dentist visits or a pair of new prescription glasses. It even covers my therapy. So, what I do is try any figure out how much I am going to spend based on last year's numbers and looking ahead at what I might need for the next year. It is kind of a tricky business because once I've set it up, I can't change it (unless I have something major happens - like I get fired, disabled or have a kid. Hopefully none of which will happen!!) Then there is the "use it or lose it" part of the plan - if I don't use it, I lose the money I have set aside. So, if I put aside $500 and only use $300, then that $200 left in the account is gone. Have I ever had that happen to me? Nope!

I always run out before the year is through. It seems like there is always an extra expense or two that I wasn't expecting. For example, this March I ended up in the emergency room and forehead full of stitches - there was absolutely no way I could have planned for that! I tend to set my account conservatively anyway and with the extra expenses - I never have money left over. Only once did I come close and then I got myself a new pair of prescription sunglasses, which I needed anyway and more than made up the difference.

So, so far so good. My FSA is set up through my employer. A bit comes out of my check each pay period, and since it is before taxes I don't even notice it. (If I don't see it, it ain't there.) I pick up my prescription for Advair which runs me $45. I send the receipt into my flex plan administrators and they shoot me a check. All is right with the world. Until I get my checks...

This is where I have been known to screw up. So, in the mail I get this un-budgeted $45 check. How cool! It is like free money!


To be honest I didn't usually take that money out and buy $800 Christian Dior shoes.** Usually the money would go towards something really productive - something worthy, like paying down my credit card debt. It seemed like such a noble cause, such a good intention - yet it backfired like Ford Pinto. Why?

Precisely because that $45 was un-budgeted money. It wasn't planned as income or as an expense. So, the money paid to the pharmacy was not on my budget as an expense, since I knew I would be immediately reimbursed, but when I got the check, instead of treating it like a reimbursement and putting it back in my checking account like I should have, I was spending it like income. Basically it was the equivalent of taking $45 out of my checking account and randomly sending it to my Mastercard - no wonder my budgets weren't working out! On top of that usually I have more than one medical expense a month - a couple of prescriptions, some therapy, a visit to a doctor later, and it was a couple hundred bucks that were missing from my account. Without realizing it my good intentions were forcing me to come up short at the end of each month!

Starting in June I began using my FSA reimbursement checks for what they really were - reimbursements. When they came in the mail, I put them directly into my checking account. And you know what? It worked. Last month I didn't get that "end of the month" crunch that I have usually felt. It kept me from dipping into emergency funds to try and cover it (another bad habit I had) and generally made me feel better. Knowing bills will be paid each month, generally makes Dawn a very happy gal.

*I am not in any position to be offering financial advice, I'm just talking about my own experiences. If you want more information about FSAs in general, Wikipedia has a neat article on them here. If you want more information about your personal situation see your employer's Human Resources person or your tax attorney.

** Ok, ever. I don't own Christian Dior shoes, but I have tried them on and thought about it!

Photo by trp0.

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