Sep 24, 2007

How much should you contribute to a Flexible Spending Account?

It's Open Enrollment season for many employers, and mine is no exception. I'm trying to decide how much I should contribute to the medical reimbursement account (MRA) portion of my flexible spending account next year (I will fully fund the dependent care portion - that's a no-brainer).

I can use my MRA to pay for all dental and medical bills, including co-pays and prescriptions, as well as contact lenses, contact solution, and the occasional package of cold medicine. One way to estimate expenses is to review expenses from previous years and assume expenses will be similar. However, that doesn't really work when you have a new family.

I know we will incur about $150 worth of expenses in vision care (opthamologist visits, contact lenses, solution, etc.). We will also incur about $75 worth of expenses in prescriptions. But that's about all I can reliably predict.

We all know that children go to the doctor a lot. But some go more than others. We've been blessed with healthy boys who don't seem to need too many visits. So for me, the tricky part is figuring out just how many times we'll need to see a doctor next year. And I honestly have no idea, because our plan covers preventive visits 100% so all regular checkups don't even have a co-pay.

However, examining previous years' expenses shows that we have routinely have surprise expenses beyond our low co-pays for walk-in visits to the pediatrician's office to make sure one of the boys doesn't have an ear infection. Therefore, it would be wise to have a cushion of at least several hundred dollars.

Each family member has a $500 deductible, up to a family maximum of $1000. So I'm thinking about a final figure in the $1000 range - maybe $1200, so that the monthly deduction is a nice round number. I think this should be enough to cover any surprise doctor's visits and tests.

The major disadvantage of an MRA is that you lose whatever you haven't used up by the end of the year (or grace period, since some employers now provide that option). I'm therefore thinking that if we are lucky enough to end up with a few hundred dollars left in the account, Marc and/or I can get new glasses. I would love to have another pair, but haven't made it a priority since my current glasses are about three years old and cost nearly $500 (before anyone gives me grief about that number: yes, it's extremely high, but it was worth it to me because it's the first pair of glasses I've ever had (and I've been wearing glasses since I was eight) that hasn't made me supremely self-conscious about wearing them).

So here's a summary of my tips:
  • 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.


MetaMommy said...

You mentioned this, but I think it's worth emphasizing that one should be conservative with estimates since unused funds are lost, unless you're lucky enough to have an employer who allows a couple of extra months to stock up on band-aids and neosporine. The fund's don't roll over from year to year like other benefits.

Anonymous said...

Good thoughts on planning for flex spending accts. I struggle with this every year. I'm always worried about not spending it all and never take full advantage! Love your glasses comment. I too have been a long time glasses wearer, and glasses that don't make me feel totally dorky are PRICELESS!

Grace. said...

Even when I've left some flex medical dollars on the table at the end of the year, this is still a wonderful, income-reducing option.

BTW, if you live in an urban environment, talk to your employer about adding FLEX parking/transportation. You can use it (up to $180 per month) for parking costs or to pay the costs of bus/subway passes.

Anonymous said...

Nice post. I always struggle with this too, but have learned to air on the side of leaving money on the table.

Usually the expenses incurred over your Flex Account amounts are still deductible, so we usually aren't talking about too much loss here. I think it helps to frame the fact that we are usually talking about pennies, not thousands. With that said, for some reason it feels like a bugger decision than it is.

ChiefFamilyOfficer said...

@MetaMommy - Honestly, even when I've been conservative, I always end up using the entire amount. Something unexpected always seems to happen!

@aande - Thanks for feeling my pain!

@I'm Grace - That's awesome advice, I actually do have that also :)

@The Happy Rock - My problem with going over the FSA contribution is that my additional expenses are never enough to be deductible (i.e., over 7.5% of my AGI) - which is a good thing, I know, but I hate feeling like I'm losing money. As I mentioned to MetaMommy, I always end up spending the full contribution anyway, but I think the contigency plan helps my frame of mind. And you're absolutely right, it definitely helps that we're talking a couple of hundred dollars, not thousands!