Financial Planning

Disadvantages of Flexible Spending Accounts



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Why do so many people not contribute to a flexible spending account? There is a good reason for this. Electing to have part of your pre-tax income placed into a flexible spending account is only right for certain people. The disadvantages add up and can actually cost an employee money, rather than save the employee money. Before investing in a flexible spending account, look at the disadvantages to using one.

The major disadvantage to relying on a flexible spending account for financial savings is that if you do not use it by the cut-off date, you lose your money. A term that has become popular for describing FSA disadvantages is “Use-it or lose-it.” It is crucial to find out if the FSA ends by calendar year or fiscal year. If your FSA limit is $1,500 and you only spend $600, the remaining $900 is lost. Not much savings in that is there? This deadline can make or break and advantages to flexible spending accounts. The fact that the IRS gives companies the option of shaving 2 ½ months off of the time you have to spend your flex account certainly does not make your life any easier. Instead of midnight on December 31st (calendar year), some businesses take advantage of the mid-October deadline to focus on end-of-the-year business expenses. This can feel like your employer is not appreciating you and that is a can of worms that does not need to be opened!

Now if you have dependents, you must additionally decide if the Childcare Credit that you normally qualify for on your annual taxes will be missed or not. Using a flexible spending account for childcare expenses disqualifies you from receiving the Childcare Credit when filing annual taxes. Low wage earners and lower middle income employees need to find out if a flexible spending account savings is worthwhile, but the Child Care Credit tend to be a better deal.

Why bother with a flexible spending account if the pre-tax savings is not even worth batting an eye? If you have costly healthcare bills, the money and pre-tax savings from the FSA will probably only make a dimple in your bills anyway. FSAs are often capped around $2,000 per individual employee. If your FSA limit is even lower, find out if the flex account is worth your blood, sweat and tears. A low limit on a flexible spending account is probably not worth the time and effort it takes to re-coop the money you have invested into it.

Some Flexible spending accounts have debit cards connected to the account, but remembering to use the card and what will qualify as an expense can be a real hassle – especially is the savings from the FSA are not very much. Never add unnecessary stress to your life. Faxing in original receipts and paper work, or worse- needing to send them in via snail mail while maintaining copies of the original documents in case the flex account company makes errors, gets old really soon. Be sure that you will not be wasting your precious time, before committing to a flexible spending account.

Have a seat and decide if the reserves and savings from a flexible spending account are what you can handle, what you expect, and right for you. The effort just to get reimbursements can be frustrating and the savings might be bland. Prepare yourself by becoming informed and ask around to find out what others think. There are a lot of employees who do not contribute to a flex account and they can help you make the right choice.

More about this author: Sarah Vigue

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