Tax time. Wish you had a few more deductions? I hope you didn’t miss out on maxing out on your flexible spending account (FSA), if your employer offers it. Most people are afraid to take advantage of the benefit, which enables workers to save up to $2,500 pre-tax to pay for medical costs.
The catch (at least for now): If you don’t use the entire amount you save, you lose it at the end of the plan year. That’s no reason to be shy about maxing out on the FSA, as I explain in a recent post for Women and Co.:
BenefitsPro, a site that follows the employee benefits business, reports that on average workers took advantage of only $1,400 of the credit, leaving a lot of money on the table they had meant to claim. “The ’use-it-or-lose-it’ structure is the No. 1 reason that employees haven’t used the FSA benefit more aggressively,” says Jody Dietel, chief compliance officer of WageWorks in San Mateo, California. “They are afraid to lose money,” she says. WageWorks manages tax-advantaged programs for corporations.
That’s a major strategic error. Depending on their tax brackets, FSA participants save 25 cents to 40 cents per dollar put in the fund. So even if some cash gets left behind in an FSA account, the odds are good that aggressive FSA users will still come out ahead. “Give yourself a raise,” Dietel urges, and take full advantage of the FSA tax deduction.
FSAs used to allow you to save up to $5,000 per person. But the IRS lowered the amount to 2013 and is now taking comments on whether it should drop the “use-it-or-lose-it” rule, which would make many more workers likely to take advantage of the benefit.