Teachers Can Save Money with a Flexible Spending Account (FSA)

A flexible spending account (FSA) enables teachers to set aside pre-tax dollars for dependent care and medical health care expenses that are not covered or reimbursed by insurance. In this way, we reduce our taxable income and pay ourselves with pre-tax dollars.

Any time we can reduce our taxable income and pay for necessary expenses at the same time, we should consider doing this!

What is a flexible spending account (FSA) and how does it work?

A FSA is a type of savings account that allows you to contribute a portion of your regular earnings to an account that you will use to reimburse yourself for qualifying out-of-pocket medical expenses with tax-free dollars. Types of allowed expenses include insurance copayments and deductibles, qualifying prescription drugs, and medical devices.

A dependent-care FSA is used to pay for childcare expenses for children ages 14 and younger as well as to pay for the care of qualifying adults, including spouses, who cannot care for themselves and who meet the IRS guidelines for child and dependent care.

You decide how much money to contribute to a FSA, up to the limit set by your employer. You are not taxed on the money you contribute.

How does a flexible spending account (FSA) save teachers money?

A FSA saves teachers money because they are paying for items with pre-tax dollars as well as reducing their taxable income.

For example, if you owe 30% in state and federal income taxes and contribute $1,000 to your FSA, you save $300 by putting that money in a FSA and using it for doctor bills, prescription drugs, or dependent day care.

Additionally, contributing to a FSA reduces your taxable income, which decreases the amount you and your employer owe in the payroll taxes, the taxes that fund Medicare and Social Security programs.

Does the type of tax return a teacher files affect whether they can have a flexible spending account (FSA)?

No. Regardless of the type of tax return you file or your filing status, you can still take advantage of the tax benefits by reducing your taxable income, which is the same as your adjusted gross income (AGI).

How do teachers get a flexible spending account (FSA)?

FSAs are part of an employee benefits package. You cannot open a FSA on your own.

If you want to open a FSA, you can do so during your employer’s open enrollment period, a window of time that happens every year, usually during the fall months. During open enrollment, you can make adjustments to your health plan, sign up for new coverage, or cancel existing coverages.

Is it worth having a flexible spending account (FSA)?

A flexible spending account (FSA) allows you to put money into an account that you will use to reimburse yourself for qualified expenses. The funds you put into a FSA are not subject to income taxes or Social Security taxes.

If you have somewhat predictable medical expenses and dependent day care expenses each year, you can expect to save approximately 20%-30% in taxes on every dollar you put into your FSA.

As your income and tax bracket rises, your savings will rise as well. Reducing your taxable income means that you will have more money for paying down debt, saving, or investing. 

Refer to the articles “3 Ways to Save Time, Money, and Energy” and “How to Get the Highest Possible Interest Rate on Your Savings” for ideas about how to save and invest the extra income you have as a result of using a flexible spending account!

What are the drawbacks to having a flexible spending account (FSA)?

All funds in a FSA must be used to pay for qualifying medical expenses and dependent care costs before the end of the plan year or the money is lost. This rule governing FSAs is sometimes referred to as “use it or lose it.”

For this reason, teachers must carefully plan the amount to be designated for a FSA to avoid putting in more money than they can use before the end of the plan year.

Should all teachers have a Flexible Spending Account (FSA)?

Because every teacher and every family’s situation is different, FSAs may not be right for everyone. Your annual medical and/or dependent day care expenses are most important factor to consider.

Determining your annual spending for qualifying medical expenses and dependent care costs will show you whether or not having a FSA would be suitable for you and how much money you should put into a FSA every month. Most FSA plans allow minimum contributions of as little as $120.00 per year.

Having a FSA may or may not be appropriate for your life situation, so estimate your projected medical and dependent day care expenses carefully as you make your decision.

2022 guidelines for flexible spending accounts

Reviewing Healthcare.gov’s article “Using a Flexible Spending Account (FSA)” will provide you with information about the annual FSA contribution limits for single people and married couples. Additionally, the article provides information about limits, grace periods, and carry-overs.

FSA funds can be used for many over the counter items as well as medical equipment. Most pharmacies have a list of FSA-eligible items. For example, Amazon’s FSA/HSA store provides one-stop shopping for qualifying items.

Conclusion

Estimating your annual out-of-pocket medical and dependent day care expenses is the first step to take in determining whether a Flexible Spending Account (FSA) is right for you.

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