Fortunately, there are dedicated savings accounts in place to help make out-of-pocket healthcare expenses more affordable. You may already be familiar with an HSA, or health savings account, which allows participants to save money for healthcare costs tax-free, but you should also be familiar with flexible spending accounts, or FSAs. Used intentionally, FSAs can help you save money. If you can use one, here’s what you need to know to make the most of your flexible spending account. FSAs are typically provided with lower-deductible health insurance plans, though employers can choose whether they want to offer FSAs. You can also choose not to contribute to your FSA. If you do opt into an FSA, you can contribute a certain amount of money to the account with every paycheck. This money will be automatically deducted from your pay and placed in the account. Some employers will even make contributions to employees’ FSAs as part of the overall healthcare package to encourage people to contribute to and use these accounts. The most important thing to remember with FSAs is that those funds are use-it-or-lose-it: You must spend all money placed in an FSA by the end of the calendar year. If you don’t, that money disappears. Some employers can choose to allow a grace period of up to two-and-a-half months in the following year for employees to use FSA funds, or they can allow employees to carry over up to $570 of FSA funds into the next year (beginning 2022, up $20 from the 2021 carryover limit), but not both. This policy means many people scramble to use their FSA funds at the end of every year by booking non-essential appointments, purchasing new glasses, getting massages, or incurring other expenses they can pay for with remaining FSA dollars. It also means using an FSA to support your emergency fund isn’t a great idea: If you’re lucky and no medical emergency occurs in the calendar year, those savings disappear. If your employer does offer an FSA, you don’t have to automatically opt in if it’s not the right choice for you. “I really encourage people to take a good look at how much they’ve spent on medical expenses previously,” Waters says. If you’ve spent very little on healthcare (outside of premiums) in the last few years, the money you contribute to an FSA might not be used. “People need that cash flow and want to put it in other places,” Waters says. If you expect low healthcare expenses, you can instead put that money toward savings, paying down debt, travel, and other goals. On the other hand, if your out-of-pocket healthcare expenses are high every year, contributing the full amount to an FSA will help you save money where you can. Also, FSAs are use-it-or-lose-it: If you’re going to choose to fund an FSA, you have to commit to spending all that money within the year, or you’ll have wasted those funds. Keep that in mind as you’re choosing whether to opt into an FSA and deciding how much to contribute. Finally, do a little research into how you access your FSA funds. Some employers offer reimbursement-only options, while others offer a debit card or checkbook that allows you to pay with FSA funds on-site. If the reimbursement process is difficult—you have to bring a paper receipt to your HSA department, for example—you may not realistically file for reimbursement, so contributing to your account is just wasting money. “We see a lot of [people] opting not to do the FSA because the savings [are] pretty negligible depending on what the filing process is like,” Waters says. If accessing funds is easy, though, that’s another reason to take advantage of an FSA.
