My employer offers a flexible spending account for all of it's employees, and for several years now we've been taking advantage of the opportunity to save on our taxes. Just how much are we saving? Depending on the year we've saved hundreds, if not over a thousand dollars – just by paying for our health care expenses pre-tax.
One year we knew that we were going to be having a baby midway through the year, so we bumped up our FSA contributions to $3000 knowing that we would be spending at least that much that year. We did end up spending about $3500 that year, so our guess on how much we would be spending was pretty close.
Last year we set our FSA contributions at $1500, and we had maxed that out about half way through the year because we had a pretty sick year with lots of doctor's visits.
This year we decided to bump up our contribution by $500 to $2000 for the year, thinking that while we may not have as expensive of a year as we did last year, we could probably still count on maxing out our medical spending without having to buy a bunch of FSA eligible items at the end of the year. Unfortunately we've been even sicker this year and we ended up maxing out our flexible spending account in March!
So the question is, how do you figure out how much to contribute to a flexible spending account?
FSA Contribution Limits
The first question we need to look at is just how much you are legally able to contribute by law. As of January 1st, 2013 Obamacare enacted a provision capping how much you can contribute to your FSA. (It used to be unlimited, limited only by your company's plan)
- FSA Contribution Limit: $2,500
So we know that you can only contribute a maximum of $2,500 per flexible spending account. If you're a married couple and you both work that would mean you could each have your own FSA, and each contribute to the max of $2,500, or $5000 combined.
How Much Should You Contribute To Your FSA?
There are a few ways to come up with a number for how much you contribute to your FSA. Some are basically just wild guesses, while others are more of an educated guess. With health care costs, however, unless we know if we're going to get sick or have health care costs in a given year, it's almost always a guess.
Since the flexible spending account money you elect to contribute has to be spent every year (it can't roll over from year to year like a health savings account), it's important to pick a number that won't require scrambling at the end of the plan year trying to max out your spending.
Just Choose A Low Number You Believe You'll Reach
If you don't really want to spend much time figuring out how much to add to your FSA, you may just pick a low amount to elect so that you know you'll reach the number just through regular prescriptions and doctors visits. In many cases this is just a low number that doesn't result in a ton of savings.
Figure Out How Much You Spent Last Year
A better way to figure out how much to elect is to figure out how much you spent in the previous plan year. Just do a quick search for health care related categories in your personal finance software (we use You Need A Budget), and you'll see approximately how much you spent that year. If last year was an abnormal year, look
Use A Flexible Spending Account Calculator
A variety of sites will offer you a comprehensive flexible spending account calculator in order to help you figure out just how much you should set aside. I have used the one on Kiplinger.com that asks you for income information, tax rates and then estimated expenses (which you can come up with based on numbers pulled from your personal finance software) and it then will give you an expected tax savings if you were to spend the entire FSA election. It will also tell you just how much you would need to spend to break even if expenses were much lower than expected.
So for our situation if we were to contribute the max of $2500 to our account and spent it all throughout the year, we could expect to see a tax savings of $849. To just break even on a $2500 contribution we would have to spend at least $1651 of the $2500 total.
How Do You Figure Out How Much To Elect?
For our family we've never had to scramble when it comes to spending the rest of our FSA at the end of the year, because I tend to be a bit conservative and elect to contribute less than we spend every year. While it would be nice to see more savings, I also prefer not to over-fund our FSA. With the new law capping FSA accounts at $2,500 as well, it should be less of a problem for us.
How do you figure out how much to contribute to your FSA? Or do you just make a wild guess?