How to estimate FSA expenses: Cafeteria Plans can save you a lot of dough

cafeteria plan (FSA)Cafeteria plans can save you a lot of money and yet are one of the most under-utilized benefits that many employers offer. One of the reasons they’re neglected is because it can seem so overwhelming to determine how much money to set aside for medical expenses. Having just gone through the process ourselves, we wanted to share a brief overview of how Cafeteria Plans (FSA) work and how to optimize your participation.

My wife graciously volunteered to write this post and it’s her first post on GFD so be sure to give her extra praise and adoration!

It’s that time of year again. Rushing around, making last-minute decisions. I’m not talking about Christmas shopping. It’s the annual employee benefits festival—you come home with all sorts of insurance papers, medical, dental, life, and (my favorite) accidental death and dismemberment. It’s not enough that you still have Christmas shopping to do before you get ready for holiday traveling—you are supposed to find the time to make important financial decisions as well.

To help you on your way with minimal loss of holiday cheer, my husband has asked me to write a helpful guide to cafeteria savings plans. Even with the risk of making my debut on his site as “the cafeteria lady,” I have agreed.

How Cafeteria Plans (FSA) work

Cafeteria plans are a great thing. By using them you avoid paying taxes on medical expenses. At the beginning of the year, you determine how much you expect to pay in medical expenses for that year. Your employer deducts pre-tax money from each paycheck, and puts it into a cafeteria plan savings account. You pay for medical expenses up front, and then submit a reimbursement claim, which is paid out of your savings account.

For example, last year we put $750 into our cafeteria plan. His company deducted $31.25 from each paycheck, before taking out taxes. As we spent money on medical expenses, I collected the receipts and submitted them to the cafeteria plan company. Within a few days the reimbursement was direct deposited to our bank account.

How much can you save by participating in a Cafeteria Plan

The first question you may have—is it worth it? Well, I figure we saved at least 30% by using our cafeteria plan*, so this year it saved us $225. Perhaps it is not worth hounding your spouse for the Walgreen’s receipts for a couple hundred dollars. However, several years ago we knew I would be having major dental work that would not be covered by insurance. That year we set aside $5000 (the maximum amount allowed), and saved over $1500. Definitely worth it!

Other benefits of a Cafeteria Plan

Another benefit (depending on how your plan is set up) is that you can get reimbursed for expenses even if you have not yet paid that much into the savings account. For example, say in January we have made two payments into our plan, totaling $62, when I break my foot and rack up a $300 emergency room bill. I can be reimbursed for the full $300 immediately.

I have also found that for professional services, I never have to pay the bill out of pocket. My cafeteria plan will reimburse me with an EOB (explanation of benefits, that lovely, confusing non-bill that your insurance company sends you). So, when I had expensive dental work done, my dentist billed my insurance company. I took the EOB (which said they would not pay a red cent), submitted it to the cafeteria plan, and received my “reimbursement” within a few days. I used that money to pay the dentist.

How to estimate your medical expenses

Great! So you’ve decided that you want to use a cafeteria plan. The next question is how, in the midst of holiday madness, do you determine how much to save. This is important because any money you do not get reimbursed for is lost. So, if you plan on $750 in medical expenses, but only have $500 in real expenses throughout the year, you lose that $250—basically you lose your savings.

If you keep meticulous records, this step is easy. Look through your previous years’ medical expenses and see how much you spent—plan on saving that amount. Perhaps add any large expenses you know are coming your way (having a baby, that long-awaited hip-replacement).

For those who didn’t track every expense for the last several years, here are some guidelines:

1. Know what expenses qualify and identify which of those expenses you typically incur

I have been surprised to find that alternative healer fees, including acupuncture and hypnosis, are reimbursable. So are chiropractor visits, some over-the-counter medications, and weight-loss program fees (with a doctor’s note). Most plans will have a handy list of what expenses qualify. If not, you can refer to the IRS website or see the links at the end of the post.

2. Determine what you spent last year

Look at your last medical and dental EOB’s—many will show the total you have spent on medical visits/services throughout the year. This won’t include all your medical expenses, but it’s a start.

3. Calculate routine expenses

Eye exams, contacts, birth control pills, and any other prescriptions qualify for reimbursement. Also, those expecting a baby can plan on many well-baby visits in the first year (at 2 days, 2 weeks, 2 months, etc.), so multiply the number of visits by your co-pay.

4. Plan for non-routine expenses such as surgeries, babies, major dental work

It’s definitely worth calling your doctor’s or dentist’s office for a cost estimate. Ask to speak with the person who does the billing. I did this, and she told me how much my insurance company will allow for certain procedures. Then I looked at my plan benefits, and figured out that we will pay our deductible plus 20%. Now I have a really good ballpark figure for what we can expect to pay.

Add these figures up, and you’ve got an idea of how much you will probably spend in the next year. Now, start saving receipts, and start saving money!

Additional Resources

*Savings of 7.65% FICA (Social Security), 7% State, and at least 15% in Federal taxes

Posted in Budgeting, Finances, Personal Finance, Saving, Taxes, Tools | 6 Comments »

6 Comments to “How to estimate FSA expenses: Cafeteria Plans can save you a lot of dough”

  1. Jodi Says:

    Here’s a tip if you are worried about losing the money you haven’t used. Go to Costco or Walmart, and stock up on a bunch of the over-the-counter things that qualify (bandaids, tylenol, etc.). This is great for your 72-hr kits, food storage, etc. and those things expire so each year you can replace any that are expired.

    I also have a confession to make, when my husband lost his job we were going to lose a potential of $1000 in cafeteria plan money (we were saving for baby expenses and hadn’t had the baby yet). We bought $800 woth of over-the-counter items at Costco, got reimbursed, and then returned them to the store and kept the money. I don’t know if that is shady or not, but it worked for us and saved us from losing the money we had already invested into the plan.

  2. sjpeer Says:

    What a juicy online confession. That’s a good point about buying over-the-counter medications. It’s only recently that they qualify as a reimbursable expense.

    It’s true that the downside to a cafeteria plan is if you over estimate or quit your job before the years up and haven’t gotten reimbursed for all the expenses, you lose that money. The other side of the coin is if you were to get reimbursed for your full amount and then quit your job before the end of the year, you wouldn’t have to pay the remainder. For example, if I allocated $1,000 in my cafeteria plan and used it all up by June and then quit my job, I would have only paid $500 into the cafeteria plan and wouldn’t be obligated to pay the rest in.

    My understanding is that the same upside and downside exist for the employer. They get to keep any unused funds at the end of the year buy they also may get stuck fitting the bill if an employer quits.

  3. Teri Pittman Says:

    Here’s another downside. This program worked really well for me at another employer where I had a Wageworks card. I could use it for any allowed expenses just like a regular Mastercard. If there was a question about an expense, I just mailed them the receipt.

    I don’t have that at this job. So I am taking home less money and I still have to figure out a way to pay for this stuff up front. Then I have to wait to be reimbursed. I may well wind up with money lost because I can’t afford to use it.

  4. Getting Finances Done » Dealing with Holiday credit card debt Says:

    […] »How to estimate FSA (Cafeteria Plan) expenses Main […]

  5. peggy Says:

    I had FSA in 2006 but never filed a claim. I was confused about it.
    Now, 2010 is it too late to file for reimbursment?
    I definitely had enought expenses.


  6. Sam Says:

    Peggy, you’ll have to check with your individual program but you can usually submit expenses well into the new year. In other words, you still should be able to submit expenses incurred in 2009. I hope that helps.

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