A Lifetime Supply of Band-Aids, and Other Possible Side Effects Of An FSA
March 14, 2012 in Member Stories
If you haven’t done it yet, today is the day to drag out your files and shoeboxes full of receipts. Tomorrow is the deadline in many companies to file for reimbursement from your health care flexible spending account, or FSA.
I’ve just finished filing my family’s receipts, and I think it may be the last time.
The idea behind FSAs sounds appealing: You set aside a certain amount of money each month before you pay taxes, and use that money to pay health care costs. You get to use pre-tax money to pay for everything from band-aids to brain surgery.
But the reality is, it’s hard for most of us to really take advantage of the cost-savings potential.
The problem lies with the “use it or lose it” feature of these FSAs. You have to decide at the beginning of the year how much money you want to set aside, and your employer puts that into a special account. Any money that you haven’t spent by the end of the year — or by the end of the grace period that some employers offer — ends up being forfeited. If you set aside $1000, but only spend $800, then the extra $200 gets sucked into the system, and you don’t get it back.
Our family has used an FSA for several years, and it has generally worked out pretty well. It’s a hassle to file all the paperwork and keep track of every single co-pay and prescription payment, but we saved several hundred dollars in taxes, and that seemed worthwhile.
This year, though, we made a mistake. We were too healthy. In the past several years, we had easily made it through the $3000 that we set aside: braces for the kids’ teeth, glasses, contact lenses, doctor’s co-pays, prescription medications, crutches — it all added up. But this year, we didn’t have any major medical expenses. We were done paying the orthodontist; my asthma was under control so I was able to drop one of my medications; we had only one trip to the ER; and no one had a serious illness.
The problem with all that good health is that last month we got a notice saying that we still had $2600 in our flexible spending account, and about five weeks to spend it.
Some of that money we were able to use by collecting receipts that we just hadn’t processed yet. But even after we filed all of those, it still left us with almost $2000.
We didn’t want to just lose that money, so we came up with an action plan to cram as much health-care spending into one month as we could. One website I checked suggested using that year-end money to stock up at the local pharmacy. We didn’t have much use for $2000 worth of band-aids or cough medicine, so we opted instead for a spending spree at our local optometrist. My daughter bought a nine-month supply of contact lenses. I ordered a new pair of glasses, and threw in a pair of prescription sunglasses with special polarized lenses as well. And my husband got an extra pair of glasses, just to have a spare pair on hand.
We’re all very happy with our new eyewear and will make good use of it, but we wouldn’t have bought it all this month if we hadn’t faced the loss of our FSA money. That has left me wondering: Is this what FSAs are supposed to accomplish — a mad rush to boost our family’s spending on health care?
The fundamental challenge with a health care FSA is that it’s hard to know in advance how sick you’re going to be in a given calendar year. A lot of illnesses come by surprise. I can make a reasonable estimate about our family’s baseline spending for health care, but I’m not going to be able to tell you what year one of us is going to need surgery or extended hospitalization.
The “use it or lose it” feature of FSAs actually discourages people from saving for health care needs. Either they fear losing money, so they under-fund their accounts, or they occasionally end up with too much money in their account — as we did — and have to buy things they don’t really need.
From a public policy perspective, it would make much more sense if the FSAs encouraged long-term savings for future health care needs.
One option would be to allow for a reimbursement of any leftover money at the end of the year. If I knew that I could get back any money that I didn’t spend, I’d be much more likely to set money aside in an FSA. It would also give me more reason to be conscientious about how I spent money during the year.
An even better option would be to allow leftover money to roll over into the next year. I would love to have saved the money that we didn’t spend last year and had it carry into this year’s account. Over time we could let this build up, and then be better prepared if someone in our family faced a serious medical problem.
The idea behind FSAs is a good one, but the “use it or lose it” provision makes it a gamble for consumers. Wouldn’t a flexible spending account be much more useful if it were actually flexible?