One of the writers on my blogroll with talents I would love to emulate (Kirsten Mortensen) posted a series on her blog concerning Health Care FSAs (Flexible Spending Accounts). She initially had a few misconceptions about them, but through three posts tells her story quite well. Then she emailed me to ask for my "take" on the subject.
Well, I AM a Human Resources Manager, after all!
You might want to read her posts first, staring with the one titled, "If it smells like a scam" and working up from there. After she read my emailed reply, she suggested I post it here. As one who is always open to suggestions, I thought, "Why not?"
At first I wasn't sure if you were talking about Health Care Savings Accounts (HSAs, which I know little/nothing about) or employers' Flexible Spending Accounts, a.k.a. "Health Care Reimbursement Accounts." It now appears you were talking about the latter.
My company through its last 3 owners has offered these FSAs. That's been over a period of 8-10 years. I've signed up for them each year, and each year I INCREASE the amount I set aside. For 2007 it's up to $2,000.
Why so much? Well, you wrote about having to “estimate or guess” how much your family will spend in un-reimbursed health care expenses. In some cases, no guessing is needed. I know how much my plan will pay for my (and Carol's) "maintenance" medication -- those are the pills we take every day. We pay $80 for a 90-day supply of each of three medications. That's $240, four times a year.
Co-pays for regularly scheduled visits will eat up another $100-$200 a year. Dental work has been costly in the past, but I don't project any of that this year. The final kicker is vision. We each see the optometrist annually and usually have to get a new prescription for our specs. My plan pays for some of that, but not all. Anyway, we have no trouble claiming the remainder on over-the-counter pills and sundries. But if, near the end of the year, we still have several hundred left over that we might otherwise forfeit... We simply order a pair of prescription single-vision glasses (Transitions!) for golf.
Bottom line: I have NEVER forfeited a penny, and I'm increasing my purchasing power by whatever my income tax marginal rate is (25%?) Now, if I only spent that last few hundred $$ because I'd otherwise lose it, that's false savings. I realize that. But that rarely happens.
For people on blood pressure medication or other maintenance meds, the program really does offer some savings. I (as H.R. Manager) often advise employees who DO know that their planned treatment during the year will cost them X dollars out of pocket, to set up a FSA for THAT AMOUNT (only!) to derive the tax savings.
As you point out, it's ludicrous to bet on whether or not Junior will break his leg this year.
Okay, now I've read your NEXT two posts in which you correctly point out that the employer keeps the money you forfeit. But Kirsten! Take my own example. If I set aside $2000, I derive a tax savings of $500. SO WHAT if I forfeit $100 through poor planning? I'm still money ahead.
Absolutely; the person who sets aside $500-$1000 and forfeits $100 or more is not better off with this plan. But in my role as HR manager I'm only recommending this FSA to a small percentage of our employees -- the ones who KNOW what they're going to spend out-of pocket and are looking for some relief. Those who HAVE no known, recurring expenses I counsel to opt out.
Another prime example is orthodontics. Typically a set of braces and all the adjustments and treatments will set back a parent $3000-$5000 (or higher). My plant's dental plan only reimburses 80% up to a maximum of $1000. If a parent KNOWS what the treatment will cost, and what the plan will reimburse, they're losing out if they DON'T set aside at least some of the difference in a FSA.
We also send out reminders to all those who do have FSAs each year. In July (mid year), October, and mid-December we remind people if they still have an unclaimed balance so they won't forfeit any. My boss uses it. Our Finance Manager uses it. Hell, our company president uses it. These are smart, financially savvy people.
You just have to understand what your KNOWN expenses are going to be (or get pretty close, which isn't that hard), know what your insurance plan will pay, and keep track.
As you point out, betting on what your UNKNOWN expenses might be, is... well, for lack of a more politically correct term... stupid.
In admiration of your talent,