[Note - If you don't live in the U.S., your only reason to care about this post is probably to satisfy your morbid curiosity about health insurance in our country. It's best that I stop here before I go into an uncontrollable rant about that...]
For a lot of us Americans, it’s that fun time of year when Fall arrives, the temperatures cool, in many areas the leaves turn, and we sit down to try to decipher what our health insurance ‘options’ are for the coming year. Around October is when many companies hold their annual period where employees can pick, among other things, their health insurance plan for the next calendar year. Whether it’s called “Open Enrollment”, the “Election Period” or some other dorky term, the idea is the same – except for birth, death, or marriage, you can only change your insurance plan once a year with your employer, and during this period is the time to do it.
[Note - One other exception is that when you start a new job that actually offers benefits, you can do all this then too, regardless of what time of year it falls.]
Assuming you have any choice at all, you’ll spend quite a bit of time trying to unravel what the various plans claim they’ll cover you for, all while knowing full well that you’re paying your premiums in the shaky hopes that they’ll pay any claims at all should you commit the sin of actually getting sick. [insert additional sarcasm here] Eventually you may end up just throwing a dart at the wall and picking whichever plan it lands on.
But usually buried down in all that benefits stuff is one gold nugget that every parent of an autistic child should very strongly consider getting – a flexible spending account.
So what is a flexible spending account? A more elaborate explanation of it is available on Wikipedia, but it more or less boils down to this.
You decide ahead of time (during this open enrollment period) how much you want to set aside for medical expenses for the next year. When the new year starts, money is deducted from each paycheck pre-tax and deposited into this account.
Example: If you decided to put $2,500 in your flexible spending account for 2010 and you are paid every two weeks, for every paycheck, 1/26th (26 paychecks in a year in this case) of that total amount is deducted before taxes from your check. $2,500 x 1/26 = $96.15 deducted per pay period.
Then, during the course of the year, you can file your medical expenses against that account and get reimbursed. Let’s say you haven’t met your deductible yet and your child’s OT visit is $125. Get a receipt, file it, and get reimbursed. For a growing number of people, claims filed with your insurance company get automatically routed through your flexible spending account so you don’t even have to file those to get reimbursed; it just happens.
Yes, you are getting reimbursed with your own money, but there are two huge advantages to this whole system.
1. That money isn’t taxed like the rest of your income. Without this account, you’re paying for health care expenses with money you’ve already paid taxes on. With this account, eligible expenses can be paid with money that you never pay taxes on. It’s not free money, but if you are in any sort of tax bracket, your savings for the year can easily get up to 15-30% or more. That really adds up. We figured we saved $2,000-3,000 this year because of that.
2. The wonderful principle of “pre-funding”. Same example: If you set aside $2,500 for next year, on January 1, all of that money is available to you for reimbursement. Yes, if you stay employed at that company through the entire year, you will pay that $2,500 into it by the end of the year, but let’s say something happens and you spend all of it on eligible expenses by February and ‘empty’ the account; that’s fine. While you won’t be able to get anything reimbursed for the rest of the year since the account is now empty, you essentially just got a 0% interest loan that you can pay back over the rest of the year with tax-free dollars. Not a bad deal.
These accounts have saved our bacon over the last couple of years. For 2008, we put $5,000 toward flexible spending (which we set six months before the J-Man’s autism diagnosis) and spent it all before May. However, by that point we had only contributed about $1,500 into the account. Sure we paid the remainder over the rest of the year, but again, it was pre-tax money and no interest. This year, with the baby and all, we put in $9,000. And it looks like we hit it just right. Next year, we’re dropping back to $5,000.
[Another note - companies are given some flexibility on where to set the maximum amount you can contribute into a flex account. The general rule of thumb is - the higher the deductible on your policy, the higher that maximum will often be. Our deductible is awful, so our max is quite high.]
And yet more good news! What qualifies as an ‘eligible medical expense’ is much broader than you might think. A good rule of thumb is that if your health insurance covers any of it – or it at least applies toward your deductible – it’s likely eligible. If you pay co-pays for anything, those almost always get reimbursed. If it’s a prescription – covered or not by your insurance – that’s almost always reimbursed. Eye doctor, glasses, contacts, dentist, etc.? Typically all reimbursed, too. But just because no insurance company would ever cover it doesn’t mean it’s not eligible. Things like contact lens solution to over-the-counter medicines to Band-Aids are usually eligible for reimbursement too.
Many stores are starting to note eligible items on their receipts. The image below is from The-Store-That-Shall-Not-Be-Named.
At Target, they put a ‘+’ next to the price of each eligible item on your receipt, along with a “Health Item Total” with an amount next to it at the bottom of the receipt. They have a helpful explanation of this on their web site. Sure makes dealing with those receipts a lot easier.
Also, read Publication 502 from the IRS. Learn it, love it. You may also want to download this expense guide from one of the larger flexible spending account administrators in the U.S. It’s helpful too as it goes into more detail than the IRS document.
Also, Vanguard has a nice article that I received the other day. Not sure how long it’ll be available, so get it while it’s hot. It not only addresses flexible spending accounts but dependent care accounts (also very useful) and other tax-savings opportunities.
When it comes to autism, most everything related to more ‘traditional’ therapies (OT, speech, developmental therapy, etc.) seems to get reimbursed with few, if any, problems. We didn’t try to get reimbursed for therapy equipment we bought for the house (peanut ball, therapeutic listening headphones, etc.) because by that point we’d emptied our spending account for the year, but I have heard that people have had good success getting those reimbursed. Usually you just file a “letter of medical necessity” (which is typically available as a form from the spending account administrator) filled out by whomever you’re seeing for therapy to the administrator of your spending account along with a receipt for whatever equipment you purchased, and this seems to work for a lot of people.
Since we do very little of what is typically considered ‘biomedical therapy’, I can’t speak to the reimbursement success rate there. Getting a doctor to sign off on that letter of medical necessity definitely improves your chances, but expect that some things that don’t fall into the eligibility categories might be denied.
So, what’s the catch? Here are a few things to be aware of.
* “Use it or lose it” – This is the one that usually shies people away from using a flex account, but it shouldn’t. Whatever you don’t use by the end of the year, you lose that money. It doesn’t carry over. So people feel pressure to estimate exactly, but in the process of worrying about losing that money, they underestimate badly. However, in many cases now the ‘year’ extends about 3 months into the following year – 15 months or so total – as a ‘grace period’. Unless you’re off by a couple thousand dollars, given that you can get reimbursed for everything from cold medicine to contact lenses, you can usually find ways to spend anything you’re in danger of losing, even if it means stockpiling Advil and saline solution for the next three years.
* On a related note, it can hurt your brain trying to calculate how much you should set aside for the next year, so much so that you end up not trusting your numbers. Our rule of thumb is to start with our deductible – which is way too high – guesstimate when during the year we expect to meet our deductible, and make reasonable estimates of how much the rest of the year will cost based on previous years’ expenses. (So deductible + estimates for remainder of year = total contribution for us.) We can download a spreadsheet of data about our health insurance claims from the previous year, delete stuff we know won’t happen again (like a baby), factor in possible changes to medications, co-pays, and whatnot, and go from there.
If all that is too much to bear, concentrate on your major expenses (peds visits, medications, therapies, etc.), add those up, and throw in a fudge factor. If figuring just those things gave me a number of $4,000, I wouldn’t hesitate to make my flex account $5,000 for the next year given all the other random expenses we end up having.
* Getting money taken out of your paycheck is scary. If you are charging all your health care expenses to credit cards or are paying installments directly to the service provider and you know you have no way of paying that off within 12 months – which I know happens – then my suggestion is to consider contributing as much as you can to flexible spending without compromising shelter, food, and clothing. Again, since it comes out pre-tax, you will save some money over the course of the year and come out a little better when tax time rolls around. Short of declaring bankruptcy, you will have to pay something toward all your health care expenses, so you might as well get some tax advantage out of it.
* If your employer doesn’t offer it or if you are unemployed, flexible spending accounts can be a big pain to set up. However, more and more financial institutions are offering these accounts to customers independently of their job situation, so look around. It’s more work for you, but it’s worth pursuing.
* If you have to file claims for reimbursement manually, it can be a hassle. It usually involves completing forms, photocopying receipts, and faxing or mailing stuff in every time you want reimbursement. To me it’s still worth it, but now our plan automatically files things that are processed through our health insurance, and that money is then direct deposited into our bank account, often before we even get a bill from the doctor’s office. This is becoming more the trend because it saves the claims people money too. Some plans even give you a debit card to pay for eligible items straight from your flex account. However, if you have to do it all manually, you probably will not bother sending in receipts for that $3 bottle of Tylenol unless you get desperate, so keep that in mind.
* Things used for health ‘maintenance’ – for lack of a better word – like vitamins, supplements, etc. are usually not eligible. However, if they are things that your doctor wants you to take or use to treat a specific medical condition – and will attest to that on a written form – they may end up being eligible. (“to treat a specific medical condition” is a useful phrase to commit to memory when wondering whether something is eligible.)
* I think insurance premiums are not eligible, especially ones that are taken out pre-tax from your paycheck.
And lastly, if you need a good laugh (or at least I thought it was funny), read my post from last year about the more humorous side of eligible expenses.
Bottom line – this sounds awfully confusing at first, but it’s not that bad when you get the hang of it. And the savings to you can be enormous. In three years, we’ve saved a few thousand dollars! Take the plunge. You’ll be glad you did.
Standard disclaimer: I’m not a tax professional or an expert in this at all. It’s debatable whether I’m that intelligent period, but that’s another story. Listen to me at your own risk! 
Consult your benefits administrator, a tax specialist, or your Cousin Vinny if you have any questions about this as you fill out your benefits papers.
Posts that hopefully are similar:
- Autism, Medical Expenses, and Tax Time in Our Family
- Fun with Flexible Spending
- The deductible record will stand another year
- Could Taxes Possibly Be Any More Complicated?
- Sensory Processing Disorder and the DSM-V – Call to Action
- Sensory Processing Disorder and the DSM-V – Call to Action (Urgent Update!)
- In which I say, “Have you ever had a child?”
