Don’t Overlook This Easy Way to Put More Money in Your Pocket

If you have an employer, you might be offered a health care or dependent care flexible spending account benefit. Flexible spending accounts are one of those benefits that can make your eyes glaze over, because at first glance they don’t seem like a benefit.

But they’re actually great, because when you take advantage of them you get to:

1) Use more of the money from your paycheck for other things
2) Reduce your tax liability

Basically, it can be like getting a little bit of a raise in the end. To show what I mean, I plugged two simplified scenarios into the Yahoo payroll adjustments calculator.

In both scenarios, the person spends about $1000 a year on expenses that would qualify for a flexible spending plan.

The Current scenario is without any pretax deductions. (In other words, without participating.) The What-If scenario is with the benefit. (The person has $42 taken out of each paycheck pre-tax to fund the account.)

Chart of how a pre-tax flexible spending account deduction might impact a paycheck

“Wait a minute,” you might be thinking. “How do they end up with more money if their take home pay is less?”

Well, don’t forget that they get reimbursed by the plan for their qualifying expenses.

So in the Current scenario, $32,184 in take home pay per year minus $1000 in qualifying expenses equals $31,184 for other things. But in the What-If scenario, the person gets $31,488 in take home pay for other things. (They still spend $1000 on the qualifying expenses, but they get that $1000 right back.)

In other words, the person puts an extra $304 in their pocket.

Obviously things will vary somewhat for each situation, but the gist of it is usually that participation = more money for you.

(Just be careful not to overfund the plan, because it’s a use-it-or-lose it thing. Remember to read up on future flexible spending account changes too when deciding how much to allocate to a plan.)

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8 comments

  • I had a flex spending account with my last insurance plan and I loved it. We always spent more each year on health care needs so it seemed like a no-brainer. I think it definitely leads to savings in the long term.

  • I love my Flex Spending Account. I use my past years expenses as a gauge on how much to put in this year.

    2010 was nice because if you put too much, you could go buy some Tylenol and reimburse yourself. However, in 2011, all medication reimbursements must include a Dr.’s prescription.

    • I read that about them requiring a doctor’s prescription, but I don’t think it will make that big of an impact. People who buy a lot of over the counter drugs (like people who are supposed to take aspirin every day) probably already *do* have a prescription for it — or at least it would be no trouble to get one written.

  • Interesting! I have an HSA, so I didn’t really look at this option! I’ll have to check it out a bit more thoroughly next year.

  • Kim

    I look at the FSA as an extension of my husbands paycheck. We always use every bit of the 3000.00 we put aside a year, and we get it all back. We would be out this money anyway so we might as well not be taxed on it. Also take advantage of the same kind of tax break if you pay daycare expenses.