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A Flexible Spending Account (FSA) can be an excellent tool for managing your out-of-pocket medical costs using pre-tax money. This means you can save money by setting aside funds to cover medical expenses not covered by insurance. If you're new to FSAs, you might be unsure about how much you should contribute.
If you don't contribute enough, you'll quickly deplete your funds and end up paying the remaining costs with post-tax dollars. On the other hand, contributing too much could result in losing any unused funds by the end of the year.
To determine how much to contribute to your FSA, consider the medical expenses you expect in the upcoming year, suggests Myles Ma, a health care expert at the insurance comparison site Policygenius. Create a list of doctor visits, therapy sessions, prescriptions, dental copays, eye appointments, glasses, contact lenses, and any other health-related expenses you anticipate for the year, as Ma recommends.
If you didn’t keep track of your spending in these areas this year, consider the essential medical services you’re likely to need in the upcoming year. This could include a routine physical, a visit to the doctor for a lingering cold, two dental cleanings, and a new pair of glasses. For more complex medical needs, you may want to factor in additional FSA-eligible expenses like pain relievers, sunscreen, allergy medication, and contraceptives.
For estimating your medical or dependent care expenses, I recommend Cigna’s calculator, which guides you through the process and helps you determine the ideal contribution amount.
If your health insurance plan includes a deductible, Myles Ma advises that you should aim to have enough saved, between your savings and FSA, to cover that deductible. However, he cautions against overloading your FSA in preparation for worst-case scenarios. “Ensure that you're not contributing more than you can reasonably spend in your FSA, or else you’ll be left scrambling to buy hundreds of dollars’ worth of bandages at year-end,” he said. “Unlike an HSA, FSA funds typically do not carry over into the next year.” Ma emphasizes that contributing too much without a plan to spend it on covered expenses is one of the most common mistakes with FSAs.
The maximum you can contribute to your FSA is $2,750 (or $5,000 for dependent care), so while you can't go too far with your contributions, it can still be a significant amount if you don't accurately estimate your eligible expenses for the year. Remember, some employers allow you to carry over up to $500 into the next year or give a 2.5-month grace period to use any remaining funds, but this option is not available with all employers.
