It’s Open Enrollment season at many jobs, which means you may have the opportunity to contribute to a medical reimbursement account (MRA) and/or dependent care reimbursement account (DCA), which I will collectively refer to as a Flexible Spending Account (FSA). In a nutshell, your employer deducts your FSA contribution from your pre-tax income, and disburses the money to you as you incur expenses. The beauty of the plan is that you don’t have to pay income tax on the money you divert to an FSA. The downside is that anything left in your account at the end of the year reverts to your employer. So the trick to maximizing the benefit is to contribute as much as you are going to spend in the coming year. You can contribute up to $5,000 each to an MRA and DCA each year.
You can use an MRA to pay for your dental and medical out of pocket expenses, including co-pays and prescriptions, as well as contact lenses, contact lens solution, and more. One way to estimate expenses is to review expenses from previous years and assume expenses will be similar. However, you’ll need to calculate differently if your family has changed or you have upcoming expenses you know about. In fact, if you have procedures that you can put off until the new year, you may want to ask if you can wait so that you can pay for them with FSA money.
A DCA can be used to pay for childcare provided by a qualifying provider, if you are paying for the childcare so you can work (you’ll need the provider’s tax ID). When my children were in daycare, I maxed out this benefit every year. A DCA can also be used to pay for summer camp for younger school-aged children.
Here’s a summary of tips I’ve shared in the past to help determine how much you should contribute to an MRA:
- Examine your expenses in the last few years and determine whether they are likely to recur.
- Determine what expenses are a given. This includes co-pays for routine doctor’s visits, contact lenses or glasses, and medication that’s taken regularly.
- Build in a cushion for unpredictable expenses, like extra co-pays and blood tests. Your past expenses can be a helpful guideline here.
- Have a contingency plan for the cushion in case you don’t use it. Glasses (wouldn’t a pair of prescription sunglasses be nice?), preventive dental work (has your dentist recommended replacing a crown?), and even laser eye surgery can fall into this category.