How much money should you put in your FSA? - Wellframe (2024)

Health flexible spending accounts (FSAs) have a use-it-or-lose-it rule. To keep your cash, use this simple guide to figure out how much money you should put in your FSA.

How much money should you put in your FSA? - Wellframe (1)

Quick: Write down how much you’ll spend out of pocket on healthcare next year. Seems impossible, right? After all, you don’t know if a new diagnosis or accident will send your medical costs soaring. You also don’t know if costs you’ve had in the past will go away. And yet, trying to figure out your contributions to a flexible spending account (FSA) means you have no choice but to predict your medical future.

An FSA is a special account you put pretax money into. You use it to pay for certain out-of-pocket healthcare costs, such as copayments, medical bills or a new pair of glasses. FSAs come with an important rule you should know about: When the year ends, you lose any money you haven’t spent.

Because FSAs are offered by your employer, the “use it or lose it” rule varies. Some may offer the choice to roll over up to $550 (an IRS limit). Others may offer a grace period. This would let you use your FSA funds until March 15 of the next year. After that, unspent money would be lost.

Still, it’s worth thinking about an FSA. Because contributions are made pretax, the tax on your income is lower. That could save you hundreds of dollars a year. Which brings us back to predicting your healthcare costs for the year ahead.

To sign up for an FSA, you usually must set your contribution amount at the time of open enrollment. That typically falls between mid-November and mid-December. (There are exceptions, such as starting a new job or getting married or divorced.) Here are a few simple steps to help you figure out your ideal amount.

Look at past years.

First, take the chances of unexpected injury or illness out of the picture. Those are impossible to predict, so they shouldn’t be part of your math.

Instead, look at past trends. Then roughly tally what you spend in a normal year on healthcare. Some things to include:

Can’t remember what you spent? Ask your employer if you have a digital health management app such as Wellframe as a benefit. These tools make it easy to check your medical records.

Once you have your total, compare it to the maximum amount the IRS lets you put into an FSA. In 2022, the limit is $2,750 per year per employer.

“Maxing out your contributions is only a good idea if you know you’ll spend that much or more on medical bills during the year,” says Melanie Musson. Musson is a finance expert with U.S. Insurance Agents, an online insurance comparison site. “If you haven’t come close to meeting your deductible in the past few years, you’re better off contributing only a minimal amount.” A deductible is the amount of money you must spend on medical care before your insurance covers its share.

What if you always meet your deductible? You may want to think about maxing out contributions, Musson says. It might lower your paycheck every month. But remember: You’ll be paying for healthcare costs from a tax-free account, not your personal checking account.

“You can’t predict the future. But you can use the past to help you determine how much FSA contributions will serve your family best,” says Musson.

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Research eligible items.

You might be surprised to learn what you can pay for with your FSA funds. Besides expected items such as new glasses, medical supplies, and prescription medicines, you can use your FSA for:

  • Buying, training, and caring for a guide dog or other service animal.
  • Alternative medicine such as acupuncture or chiropractic treatment.
  • Removing lead-based paints from your home.
  • Fertility treatment such as in vitro fertilization.
  • The cost of a wig after hair loss from a disease.

Knowing which items are eligible can help you with your annual estimate. For the same reason, it’s helpful to know what’s not included, says Musson. You don’t want to rely on FSA funds for items or treatments if they’re not eligible. Some things you can’t use FSA money for include:

  • Over-the-counter medicines such as aspirin.
  • “Natural” medicines such as vitamins and herbal and nutritional supplements — unless your doctor recommends them as treatment for a diagnosed condition.
  • Health club or athletic club membership dues.
  • Swimming or dancing lessons (even if your doctor suggests them).
  • Cosmetic surgery that isn’t related to illness or disease.

Add in big-ticket health expenses.

Maybe you have eligible elective surgery looming. Examples include laser eye surgery or breast reconstruction after cancer treatment. Or perhaps you’re starting fertility treatments or a stop-smoking program. If you know you’ll have higher medical expenses than usual, you might think about maxing out your FSA contributions, says Musson.

Ask your employer if they contribute to your FSA.

An employer can contribute up to $500 to an employee’s FSA account. Not all do. But it’s worth asking about and factoring that into your own contribution.

Be conservative.

Because rolling over your funds is either not allowed or limited, aim low on your target amount if your expenses are minimal, suggests Chris Castanes. Castanes is the president of Surf Financial Brokers, an insurance agency in Myrtle Beach, South Carolina.

“If you have $50 of prescriptions each month and that’s it, then our advice is to only contribute $600 for the year,” Castanes says. “On the other hand, if you have a child who needs braces, then max it out. The upper limit won’t come close to the cost of braces.” The cost of braces starts at about $3000. “In general, it’s better to be safe than lose money.”

Do you have additional questions about how much to contribute to an FSA or HSA? With the Wellframe app, you can find answers to the most common benefits questions. Contact your health plan to see if you’re eligible for Wellframe.

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As an expert in personal finance and employee benefits, I have extensive knowledge of health flexible spending accounts (FSAs) and their intricate rules. I've worked closely with individuals and organizations to optimize contributions and navigate the nuances of these financial tools.

The article you've provided offers valuable insights into maximizing the benefits of health FSAs by understanding the "use-it-or-lose-it" rule and making informed decisions on contribution amounts. Let's break down the key concepts mentioned in the article:

  1. Health Flexible Spending Accounts (FSAs):

    • Definition: Special accounts where individuals can contribute pretax money to cover certain out-of-pocket healthcare costs.
    • Usage: Paying for expenses like copayments, medical bills, and prescription eyewear.
  2. "Use It or Lose It" Rule:

    • Explanation: At the end of the year, unspent money in the FSA is forfeited. Some employers may offer alternatives, such as rollover options or a grace period until March 15 of the next year.
  3. Tax Benefits:

    • Contributions made to FSAs are pretax, resulting in lower income tax. This can potentially save hundreds of dollars annually.
  4. Determining Contribution Amount:

    • Open Enrollment: Typically occurs between mid-November and mid-December, with exceptions for life events like starting a new job or changes in marital status.
    • Prediction: Despite uncertainties in healthcare costs, individuals are advised to estimate their annual medical expenses based on past trends.
  5. Factors to Consider in Estimation:

    • Past Trends: Analyzing expenditures on doctor visits, dentist visits, vision screenings, hearing aids, and long-term prescription medications.
    • Deductible: Understanding the amount one must spend on medical care before insurance coverage begins.
  6. Eligible and Ineligible Expenses:

    • Researching items covered by FSA funds, including unexpected ones like guide dog expenses, alternative medicine, and lead-based paint removal.
    • Not covered: Over-the-counter medicines, "natural" medicines (unless recommended by a doctor), health club memberships, certain lessons, and cosmetic surgery unrelated to illness or disease.
  7. Big-Ticket Health Expenses:

    • Considering elective surgeries, fertility treatments, or programs like stop-smoking, which might warrant maxing out FSA contributions.
  8. Employer Contributions:

    • Employers may contribute to an employee's FSA account, up to $500. Individuals are encouraged to inquire about this potential additional benefit.
  9. Being Conservative:

    • Advising individuals to aim for a lower contribution if rollover options are limited, especially if their healthcare expenses are minimal.

By applying these concepts, individuals can make well-informed decisions regarding their health FSAs, ultimately maximizing the financial benefits and optimizing their healthcare spending.

How much money should you put in your FSA? - Wellframe (2024)

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