On Flexible Spending Accounts

I was recently intrigued by a article titled, I Still Hate Flexible Spending Accounts. My current employer is the first to offer the tax-advantaged medical account, and it saved me around $850 this year. They are a great tool for those with high medical expenses. However, for those with less predictable expenses, it may be tricky to estimate how much money to withhold.

I’ve been following author Alex Tabarrok–economics professor, author, researcher, and prolific thinker–for over a decade, and he’s one smart cookie. I was curious how he drew his conclusion.

The article references a new report in Money, which claims that “44% of workers with FSAs in 2019 forfeited money. On average, the amount lost totals $339 per person… With reliable data on how often workers forfeit, how much they forfeit and how many FSAs workers hold, we can now reasonably estimate that workers forfeited approximately $3 billion in 2019 and $4.2 billion in 2020.”

Alright, I understand the point. Employees put aside a set amount to cover medical expenses incurred over the year and they may a) forget about the FSA account, b) spend less than anticipated, or c) have their claims denied by the provided. Any of these things could spoil the usefulness of the FSA and lead to lost lost funds at the end of the year.

Taborrok then goes on to share a somewhat dramatic quote from Scott Sumner: “Imagine a government that took 10% of each person’s income, and put in in a wooden box. The box was placed at the end of a 10-mile gravel road. Each citizen was given a knife, and told they could crawl on their hands and knees down the road, and then use the knife to cut a hole in the box, and retrieve their money.”

It’s my impression that the FSA is viewed as some nightmarish hassle to save a few bucks on taxes. I must have gotten lucky with my FSA program, as it’s quite simple.

Once an expense has been incurred, I submit some paperwork for reimbursement. For medical appointments or procedures, I upload the explanation of benefits from my health insurance provider. For pharmaceuticals, over-the-counter medications, sunscreen, menstrual care products, and other medical-adjacent expenses, a simple receipt will do. I’m reimbursed the first Friday following submission, and have never had a claim denied. If I wasn’t concerned with credit card points, I would charge it to my preloaded FSA benefits card and bypass the whole reimbursement process.

For those suffering from a chronic illness, anyone diagnosed with an acute condition requiring surgery or hospitalization, women planning to give birth, or those taking expensive prescriptions, the FSA offers a great tax cut on these known expenses. Like any other tool, it’s best wielded with a plan in mind. Without a plan for the funds, the use-it-or lose it account may go to waste.

All of my 2022 FSA funds ($2,850) were spent within the first half of the year. I personally take several expensive compounded medications for autoimmune dysfunction. None are covered by insurance so, in my case, the FSA is helpful. If by some miracle I no longer require the expensive medications, I would use funds for the Grail Galleri cancer screening ($900), a focused ultrasound device for pain management ($1,300), or to retake the ProdromeScan plasmalogen test ($500). There are many eligible products, many of which you wouldn’t expect.

While I completely understand the argument that it can be tricky to project next year’s medical costs in advance and recognize that some FSA administrators may not be too user-friendly, I would argue that the tax-advantaged medical account is a great option for those with recurring or big-ticket expenses on the horizon. While I also agree that the use-it-or-lose-it model is a bit unfortunate, those are the constraint we’re forced to work within. If you don’t need surgery, you can buy a massage gun and lifetime worth of bandages. At the end of the day, the forfeiture of funds is a choice.

As an aside, if you have the slightest interest in economics, Marginal Revolution and it’s comment section are home to some of the brightest minds. My interest is quite minimal, yet it’s consistently one of my favorite blogs.

7 thoughts on “On Flexible Spending Accounts

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  1. I agree that the FSA is great if you can plan your expenses. The key, of courses, is to not set aside too much. I found it better to be very conservative. My biggest challenge was getting receipts approved. I’d use my FSA card to pay a qualified expense, but would then need to send in the receipt as proof. I have had receipts rejected and then had to appeal. Thankfully it was resolved each time, but a real hassle to be honest. I personally prefer holistic medical care – not covered by most insurance. I now only set aside $500 “emergency” co-pay money that would cover possible emergency care visit or virtual care visit. It could also be easily used up with a dental cleaning or new glasses. Thank you for this post!

    Liked by 2 people

    1. Yes, you’re absolutely right–you don’t want to risk losing the money. I must be very fortunate with my FSA company, as I’ve never had a denial or request for additional paperwork. I also rely primarily on holistic practitioners, none of whom accept insurance, but most of whom are qualified under my FSA. I went into 2022 knowing that one of my physicians was $500/hour and my compounded medications would be $700+/month for at least several months–knowing that the $2850 would be spent, easily. Once my health has stabilized, I plan to take your approach to set aside a conservative amount to cover co-pays and whatnot. Thank for reading and taking the time to comment!

      Liked by 2 people

  2. My current company offers an FSA, while my previous company pre-covid offered an HSA. The HSA is far superior as it doesn’t expire at the end of the year. Unused money just keeps getting added to, and in retirement we can use the money for any living expense, not just medical needs. Long after (years) I had stopped working for the older company I was able to use the leftover funds for paying towards 3 root canals this year.

    Wishing you wonderful blessings this year!

    Liked by 2 people

  3. I used to utilize the FSA plan provided by my employer, but like Lex, had so many hassles, it got to where the tax savings wasn’t worth it. Glad to hear you’ve had good luck with yours!

    Liked by 1 person

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