Flexible Spending Accounts (Health Care, Medical, FSA, HCSA): Strategies and FAQ

I have some fairly advanced strategy questions regarding my companies "Flexible Spending Account" (or "Health Care Spending Account"). For those unfamiliar with the basics, you may wish to read some of these archived threads: (or search on "flex")

Cafeteria Plan / Section 125 Medical Reimbursement Question
Anyone lose money in their flexible spending account?
Overdrafting FSA (Flexible Spending Account)
Suggestions required to use up FSA money
How to spend $300 of Flexible Spending Account money
Help needed for upcoming medical expenses
IRS publication 969 - Health Savings Accounts and Other Tax-Favored Health Plans
IRS publication 502 - Medical and Dental Expenses (for what qualifies as a valid expense)

First and foremost, FSAs are offer tax savings on expenses you were going to incur anyway. The quick summary is that you decide an amount to contribute (deducted tax free, evenly from each paychecks) prior to the start of the plan's year. Then you submit receipts for any qualified medical expenses for reimbursement, up to the annual amount you elected. The catch is that any money not claimed during the year is lost! FSAs are best for expenses you are fairly sure you will incur. Several often overlooked but qualified expenses include mileage costs for doctor's visits and OTC medications.

The basis for many common FSA strategies is this, from IRS publication 969 (a good reference on FSAs and more recent similar accounts)

Distributions from a health FSA must be paid only to reimburse you for qualified medical expenses you incurred during the period of coverage. You must be able to receive the maximum amount of reimbursement (the amount you have elected to contribute for the year) at any time during the coverage period, regardless of the amount you have actually contributed. The maximum amount you can receive tax free is the total amount you elected to contribute to the health FSA for the year.
The most basic strategy applies when you are planning to quit your job and have anticipated medical expenses. You can get fully reimbursed for your full annual contribution amount (say $1200) while only having money taken out of the paychecks you actually receive prior to your departure (say $100/month for 3 months before you quit). No, you don't have to pay back the extra $900.

Certain "qualifying life events" allow you to change your annual contribution amount mid-year, including marriage, divorce, having a child, change in employment status, etc. Typically these changes must be made within 30 days of the event. I am interested in how this right to change your contribution mid-year might be used in a similar way to get the most benefit. Some ideas for strategies I've thought of include:

1. Start with a high amount, get fully reimbursed early in the year, and then reduce your contribution to $0 after the event. Same sort of result as above, but you can keep your job .

2. Start with a low* amount, wait until late in the year when the event occurs, and then increase your contribution. This allows the amount chosen to be more accurate. Also, if you increase your contribution drastically (ie. in excess of your last paycheck) at the end of year, you might still be able to claim the full amount while not having to pay in the full amount. (* - I think a low amount might be better than zero since you could still submit receipts from the whole time you're covered under the plan)

Does anyone have any experience in doing these sorts of things? What has worked for you, and what problems have you run into? Are there any general restrictions on increasing or decreasing your contribution that you have encountered?

Thanks in advance!

PS I'll head off the first response to all these questions - yes I've read my benefits info, will be talking to my HR department, and have already made some general inquires. For example, they require a letter from your current employer to confirm ending employment. Having a specific plan in mind ahead of time seems better than walking in and asking how I can get the most out of my plan without paying for it .

Ok, here's our situation. We were trying to get pregnant and figured at some point this year it would happen. So, we picked a certain amount for our FSA during the enrollment period last December. Granted, it was a little lower than what is necessary for our out of pocket expenses, but we also didn't know whether or not we could even get pregnant (first child). We got really lucky and my wife got pregnant right around January 1. We couldn't have timed it better since (1) our insurance company's calendar year is January 1 through December 31 (we won't have to meet deductibles twice for the same pregnancy) and (2) the due date is in September, leaving us plenty of time to increase our contributions for the last few months this year. If you're planning on having a baby, do your best to time it so that your insurance calendar (if you have deductibles) and FSA calendar are taken into account. Granted, getting pregnant is not something you can control, but it certainly is fun trying.

Incidentally (side note), we also got really lucky and signed up for short term disability insurance through her benefits department right before my wife was "diagnosed" as pregnant. I would also suggest to anybody trying to get pregnant to find out if you have this option. My wife is planning on using sick time and taking 6 weeks off after the birth. Because she'll be using sick time, she'll continue to get her paycheck. The supplemental insurance will "double pay" her a fraction of her salary during that same period of time. The premiums are about $50/month, but it's well worth it if you time it right considering you get back a lot more than $50 x ~9 months of pregnancy.

t0s9476 said: Here in TX it's bad to have kid after Sep 2nd because he/she will miss the deadline for school (have to wait for the next year)In CA it's "bad" to have a kid after Jan 1st for the reason you give above. Dec 31st and earlier start school like everyone else, even if only 4 years old.

What's even crazier is that we'll make money by having a baby. Maybe not in the long run...

I claim the $14 copay for my wife's birth control pills against my FSA. I've been doing it for 3 years without a problem.

I've thought before about these ways to scam/weasel money out of FSA programs. However, I think there is one hitch, but I never got around to looking it up to be certain.

As far as I know, the money for the FSA doesn't come from the company administering the plan. I thought it came from the employer. In other words, I set up a plan to put $1200 in my FSA. Jan 1, my employer pays the plan administrator the whole $1200, then my employer reclaims it from me at $100 per month. Then the plan administrator holds the money, dishes it out to me on request, and pockets whatever is left over.

The hitch here is that while the scam works if you are leaving your job, it might not work quite so well if you remain employed during the process. Your employer might not be so happy about you trying to pull one over on THEM. However, there might not actually be a problem here, because you might just end up unemployed anyway.

P.S. Of course, if you work for a large employer, this might just slip through the cracks, but I'm sure a smaller company would notice.

xerty To get back on topic - one I've also done some research onThe most basic strategy applies when you are planning to quit your job and have anticipated medical expenses. You can get fully reimbursed for your full annual contribution amount (say $1200) while only having money taken out of the paychecks you actually receive prior to your departure (say $100/month for 3 months before you quit). No, you don't have to pay back the extra $900.Exactly the way my company plan works1. Start with a high amount, get fully reimbursed early in the year, and then reduce your contribution to $0 after the event. Same sort of result as above, but you can keep your jobOf course2. Start with a low* amount, wait until late in the year when the event occurs, and then increase your contribution. This allows the amount chosen to be more accurate. Also, if you increase your contribution drastically (ie. in excess of your last paycheck) at the end of year, you might still be able to claim the full amount while not having to pay in the full amount. (* - I think a low amount might be better than zero since you could still submit receipts from the whole time you're covered under the plan)Nope. My plan does two things.
1. The maximum you can contribute to the plan per month is the annual max / 12. So if you raise your contribution during the year due to a life cycle event, you are limited by how much you can increase by the annual max /12
2. How much can be withdrawn is limited by total annual contribution.

i've gotten advances on the FSA and quit thus pocketing the difference. very simple. and i upped my contribution after my wedding to make up the difference.

since last year, FSA allows you to buy OTC medication like tylenol or antacid. so keep those receipts. FSA still don't cover vitamins tho.

I'm on my second year doing the FSA. The money comes out of your check pre-tax over the course of the year, but you can spend the whole thing as soon as the year starts. You cannot cancel contributions once they start. I tried that. They will take the money out all year long. Supposedly if you spend it all before leaving the company you won't have to pay it back, but I have no first hand knowledge.

There are some things which are covered but you need to get a note from your dr to push it.

These are just a couple which I had in the past but were approved.

gym membership
heart rate monitor
ankle brace
certain dental work


Rambler said: I just had quite a scare with my flex account - I requested reimbursement for the downpayment on my kids braces ($400) and they rejected it. They said cosmetic stuff like braces is a no-no. After I crapped my pants, I called and finally got someone who said if the orthodontist wrote in saying it was medically necessary, they'd pay. Got the guy to fax in a letter to that effect, and sure enough my reimbursement came a week later.

Rambler said: I just had quite a scare with my flex account - I requested reimbursement for the downpayment on my kids braces ($400) and they rejected it. They said cosmetic stuff like braces is a no-no.
Sounds like someone was giving you an unnecessary hard time - braces are specifically mentioned as allowed in IRS pub 502. Teeth whiting, for example, is not as it falls under the "cosmetic" category.

Everyone's probably familiar with the strategy of scheduling Lasik surgery in January so that it's financed over the year through the FSA. A side benefit is that if your company crashes (I've survived two companies crashing in the last 5 years), you're off the hook for the rest of the payments that year. [Got hosed out of vacation pay though]

Do not underestimate what a great benefit this is. This is pre-tax money, eye-glasses, Dental crowns, root canal, these can add up to a lot of money even with the copay.
Humidifiers, dehumidifiers, air purifiiers, condoms, birth control, arm braces, ankle braces, Eye glasses, and the other stuff mentioned.. these are all ligit flex expenses. In a use it or lose it account it works both ways. As mentioned if you don't spend the full amount you lose it.
If you contribute say 5k in January, have lasix in February and youve only contributed say 100.00 bucks so far, you will still be reimbursed for the 5k even though you have not contributed 5k, then if you quit or are layed off in March you DO NOT owe the money back. This is for use it or lose it type flex spending accts. Ask your plan administrator. If worse comes to worse and you have money you need to spend, buy a pair of 2000.00 eyewear and sell it .

i'm going to stop using FSA and start with the HSA when they let you invest the funds in the stock market

what are some strategies if you are the only employer and shareholder of an s-corp?

I have my parents, siblings & friends at work who buy OTC stuff give me their receipts - like Fredo mentioned I've never had trouble using them. That and the mileage for same (funny I don't remember that drive) tends to use up about half my FSA contribution.

This year my healthcare FSA has been automatically reimbursing me for my doctor's and dental copays. I pay the bill say on 3/15, and get an automatic deposit about 3-4 weeks later. Very nice and no hassles.

miserly said: FSA still don't cover vitamins tho.
Unless they are prescribed

Of all the discussion here I think you are missing out on something that comes if you are terminated and invested into your FSA account. It's called COBRA, and important discussion can be found here, here, and most definitely here.
When I was terminated from my company, imagine my astonishment when I was told that I would be able to claim the remaining money that was prefunded. So, when I left I had contributed $350/mo to the fund and could claim every remaining penny as long as I had receipts for the qualifying expenses.

update: My company (General Electric) prefunded the FSAO for $3,000 before I left the company. Thirty days after leaving, I chose to continue my FSA using Cobra. You pay the exact fee you were while employed (in my case, $519 through Cobra but %508.62 while employed with GE) plus 2% administrative fee.

Luckily, I had Crowns on my teeth, which ate up $1,714. Chiropractic bills, massage therapy, and my final two dental payments (braces) ate up $2,997.00. This was all from January 1-April 4. To say that I am ecstatic is an understatement! The FSA came in very handy!

So if I encur $1100 in medical expense in March but I have only commited $600 for the year and have a baby in November, can I increase my contribution to $1100 and claim the leftover $500? This is exactly my situation right now. Also if we are expecting the baby to be born in November, can we make the change now?

Thanks a lot, this is a very interesting discussion.

Dependent Care FSA is FSA