HDHPexpert.com focuses almost exclusively on HDHP plans and how they work side-by-side with HSAs.  Here we will briefly explore Flexible Spending Accounts (FSAs) which also have substantial value for those looking to save money on their health care expenses.  Please note that FSAs are rarely paired with HDHPs.

So what is an FSA? Why would an employee want one? More importantly, why would an employer want to offer one to their employees? Let’s explore why these programs are so valuable to all parties involved.

A Flexible Spending Account (FSA) is an IRS approved, tax-favored account that allows you to pay for eligible medical and/or dependent care expenses (this includes day care services for children and adults). Each pay period, a portion of your pre-tax salary is deposited into your FSA. You are then reimbursed from this account for your eligible expenses. This allows you to save on income and Social Security taxes.

As an employee, you will save your portion of FICA taxes (7.65%) and not have to pay income tax on whatever money you elect to have put into your FSA account. Using the example of $1000, an average American would save $77 of FICA, and approximately $250 of income taxes, assuming a 25% tax rate. That is $327 back in that employee’s pocket!

So what is in it for an employer? Since FICA is split, so the employer also saves 7.65% of all money put into FSA’s by their employees. More often than not, this savings outweighs the cost of having the FSA in place. In my experiences instituting an FSA is a no-brainer for companies because no other programs exist that save money AND increase employee retention.

Many are scared off by the perceived hassle of having to save receipts and submit claims to their FSA provider. Not to worry though – moving forward into 2009 and beyond, more and more retailers and FSA-administrators are supporting debit card-based FSA programs. At press time, the two big W’s are already onboard with this great convenience – Walgreens and Walmart. I personally find that this convenience is the driving force behind increasing FSA popularity.

What is the ‘use it or lose it’ rule I hear so many bad things about? Well yes IRS regulations specifically state that money contributed to an account but not used by the end of the plan year will be lost. A fear of losing earned money is natural, but with simple planning and education, FSA’s are not complicated and rarely result in financial losses.

In summary, FSAs save FICA for employees and their employers, with employees benefiting doubly because they are also not paying income taxes on their FSA money. Don’t let the ‘use it or lose it’ idea scare you off – with simple planning and education, FSAs are a no-brainer for those who want to spend pre-tax dollars on qualified medical expenses and are ineligible for an HSA.