How to Maximize Your FSA and Transit Benefit Before You Lose It

By Brittney Laryea & Shen Lu

 

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The end of the calendar year is generally an important time to pay attention to your workplace benefits accounts. You may already have gotten an email from the head of your workplace’s HR department about making your elections for the coming year and maybe even made them already. While you’re at it, take a look at the balances in your flexible spending accounts and transportation benefits accounts — they may need your attention.

Workplace benefit accounts like your health flexible spending account (FSA) and transportation benefits accounts help you save money on the important line items in your budget like your healthcare bills and getting yourself to and from work. Since the accounts are funded with pre-tax dollars, you could help your dollars go up to 40% further on common expenses — like getting a checkup or a bus pass — that help you keep and maintain your job. However, if you don’t quite know how to best use these accounts, you could actually end up losing the money you have socked away in your benefits accounts.

Read on or click ahead to learn the ins and outs of using these benefits accounts and what you can do, if anything, to save your money when you’re in danger of losing it.

Flexible spending accounts

What is a flexible spending account?

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A flexible spending account (FSA) is an employer sponsored reimbursement plan. It allows you to set aside pre-tax money and spend it on eligible medical expenses.

For 2018, you can contribute up to $2,650 to your health FSAs, up from the 2017’s limit of $2,600.

In an ideal world, you’ll avoid losing income by using up all your funds for eligible medical expenses by deadline. But the reality is that it’s tricky to budget for medical expenses for the next year (generally you can only adjust your contribution from each paycheck during open enrollment or during a qualifying life event, such as marriage or birth of a child). Many find themselves with excessive balance in their medical FSA at the end of the year.

It’s actually not that flexible given its “use it or lose it” rule — you have to use all the funds by the deadline, otherwise you lose the money. Several plan advisers confirmed to MagnifyMoney that many people underutilize their medical benefits. FSAStore.com, a one-stop-shop website stocked with FSA-eligible products, reported that each year, hundreds of millions of dollars was forfeited back to employers simply because consumers do not deplete the funds in their accounts.

So how can you make the best use of your medical FSA and avoid wasting money? We have done research and asked experts for you.

How can I use my health FSA funds?

First off, the medical FSA reimburses you for you or your dependent’s expenses that are not paid by your health insurance.

The eligible expenses include copayments, coinsurance and deductibles, prescription costs, vision and dental expenses and many over-the-counter (OTC) items — prescribed or unprescribed. But note that you cannot pay your monthly insurance premiums with the FSA.

If you have money left over in your FSA, you may want to consider getting new prescription glasses, prescription sunglasses and contact lenses. Those are some of the most common big-ticket items you can purchase with your FSA.

You can also stock up on things like first aid kits, contact solution, bandages and sunscreen that you may use year-round.

Your FSA plan provider will have a list of eligible over-the-counter items you can purchase at the pharmacy with your FSA, such as this one. Many of the pharmacy sites have sections of their sites that list all the FSA eligible items.

Another possible way to use the money would be scheduling check-ups with all your physicians. Your annual physicals and other preventative care are covered by your health plan, but if you need special medical treatment, you can use the remaining funds for copays, coinsurance or prescriptions.

Many FSA providers recommend you visit FSAStore.com.

How much should I contribute to my health FSA?

Becky Seefeldt, director of marketing at Benefit Resource, a benefits programs provider, said the average 2017 contribution was $1,250, based on the company’s 300,000 participants. That’s roughly half of the maximum amount one could contribute for the year. For those who over-contribute to their FSAs, by the end of the year, Seefeldt said, they usually have less than $100 left in their account.

Experts suggest you contribute conservatively because there is a chance that the unspent money might be forfeited. But everyone has a different situation; it’s hard to give a single guideline that fits all.

You really need to do the math when budgeting your contribution for the next plan year during open enrollment.

Nicole Wruck, a national health practice leader at Alight Solutions, told MagnifyMoney that most of the company’s clients over-contribute every year. She suggests consumers keep track of their health care expenses they had over the last year and plan accordingly for the coming year.

You will need to do the math based on the factors below:

  • What did you spend on prescription drugs?
  • What did you spend at the doctor, or the dentist, or the eye doctor?
  • Do you have any upcoming things planned in the next year that might make you experience some additional costs? For example, are you or your dependent expecting a baby? Will you need new glasses?

To help yourself run the numbers, you will want to study your health care plans. Know your deductibles — the amount you pay for health care services before your health insurance begins to kick in — as well as your copays and coinsurance. Learn what your out-of-pocket maximum is — the most you have to pay for health care services in a plan year. After you hit your out-of-pocket max, your insurance company covers your healthcare costs for the rest of the year.

Visiting your doctors can also help. Sometimes your year-end doctor visits can help you estimate your next year’s out-of-pocket medical expense. For instance, if your dentist tells you that you will need orthodontic treatment in the near future, then consider maxing out your FSA for the next plan year to cover the big dentist bills your insurance company won’t pay.

What happens to leftover funds at the end of the plan year?

Traditionally, you would have to use up all your remaining funds by Dec. 31. But there are two options employers can adopt to make the rules more lenient now.

The roll-over option. It allows up to $500 in your FSA per year to roll over into the next plan year, so participants don’t have to rush to use the remaining funds. Seefeldt said about 40 percent of employers now adopt the roll-over option.

An extended grace period. This gives participants an additional two and half months — through March 15 — to use up the money from the previous year. At the end of the grace period, all unspent funds will be forfeited to the employer.

Depending on how your company decides to do with the FSAs, you may have a little bit more leeway to use your funds by the year end. Check with your human resource department and your FSA plan provider to find out which option is available to you.

What happens if I leave the company before I use all my FSA funds?

If your eligible expenses incurred before you left the company, you may be able to request reimbursement through your company’s claim submission deadline.

If you leave the company in the middle of the year but you have used more funds in your flexible spending account than contributed. You may not be required to pay back your company.

You have access to the total amount you have allocated for the year after your first medical FSA deposit, regardless of the balance in your flexible spending account. You are reimbursed based on your company’s pay schedule as you submit claims.

For example, if you elected to put $2,000 into your FSA throughout the year, and you have a $2,000 dental expense in May, your FSA would reimburse you for the whole $2,000, even though you’ve only contributed about $833 by then.

If you jump ship in August, you may not have to pay back the rest of your contribution. Your company will cover it: It agrees to take the potential financial risk when it signs up for the FSA program. Don’t feel too guilty just yet — your company may be able to offset the financial loss with the unspent funds forfeited from other employees.

Now, if you have money left unused in your FSA, first, try to use it as much as you can before you part ways. But If you can’t use it up by your last day, you may have a chance to extend your FSA benefits if you choose to enroll in COBRA.

COBRA allows former employees, retirees, spouses and dependents to get temporary continuation of health benefits at group rates. FSA is one of the COBRA-eligible benefits.

Generally, you have until the end of plan year to use up money left in your FSA through your prior employer, but it’s most common for someone to take their FSA COBRA for one or two months and use the funds quickly, Seefeldt said. Under COBRA, you can continue to make your health plan contributions (but pay an additional 2 percent administrative fee) before the new plan kicks in, according to the Society for Human Resource Management.

Say you leave your company in August but there is $400 left in your FSA, and you plan to continue your health insurance coverage through your previous employer for two months before your new insurance plan kicks in, you can keep submitting expenses up to $400 in that period of time but pay an administrative fee that’s 2 percent of your monthly premium. But you are not required to purchase the health coverage in order to use your FSA balance.

Again, money in your FSA cannot be used to pay your premiums. But you can use it to cover eligible medical costs.

If you’re not eligible to continue your FSA through COBRA, try to use up the money before your job ends so that you won’t leave it on the table.

Transportation benefit accounts

What are commuter benefits?

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Transportation benefit accounts, also known as commuter benefits accounts, let employees use pre-tax dollars to pay for the costs of commuting. The accounts are meant to act as an incentive for employees to use eco-friendly transportation options like carpools, mass transit or bikes on their commute to the workplace.

Commuter benefits help many workers save on their transportation costs. But, it’s possible just as many workers aren’t completely sure how their transit benefit account works, or how to make the most of it.

How can I use my commuter benefits?

If you drive to a park-and-ride, catch mass transit or ride a bike to get to work, you may be able to use pre-tax dollars contributed to a commuter benefits account to cover some or all of the cost of your commute. However, if you ride solo to work or don’t use a bike or mass transit options available to you, you won’t be able to use commuter benefits to, let’s say, pay for the gas your personal vehicle burns during your bumper-to-bumper commute each morning.

However, you may be able to take advantage of parking benefits, which we’ll explain below.

You can use the money in a transportation benefits account to pay for any of the following eligible expenses:

  • A ride in a “commuter highway vehicle” to or from home and work.
    • This is another way of saying carpooling. Riding to work in a commuter highway vehicle counts if the vehicle can seat at least 6 passengers, according to the IRS. You might not have to go through the hassle of organizing a carpool with your coworkers or neighbors to use your transportation funds this way. Some commuter benefits programs allow you to carpool using rideshare apps like Lyft or Uber, too. All you’d need to do is use your commuter benefits card to pay for UberPOOL or Lyft Line rides and join the carpool when it arrives to pick you up.
  • A transit pass.
    • A transit pass is any pass, token or other tool that permits you to ride mass transit — like a train, ferry or bus — to work.
  • Qualified parking.
    • If you need to pay to park on or near your workplace, or you have to pay for parking in order to catch a ride on public transit for work or you pay for parking for any other work-related reason, you can use your transportation benefits to cover the charge.
  • Qualified bicycle commuting reimbursement.
    • You can use up to $20 per month in transportation benefits to purchase a bicycle, make improvements or repairs to the bike, and pay for bike storage as long as you use the bicycle for regular travel between home and your workplace. Be warned: If you use your transportation benefit to be reimbursed for commuting via bicycle at some point during the month, per IRS rule, you won’t be able to use the transportation funds for any of the three aforementioned eligible expenses in that particular month.

How much should I contribute to my transit benefit?

How much you contribute to your commuter benefits account will depend on how much you spend on transportation to and from work each month. Look at your monthly commuting expenses. Do the math to figure out what you would need to contribute from each paycheck to cover the cost of your commute to work. To avoid over-contributing to your transportation benefits account, be sure to to pull out a calculator.

Step 1: Estimate how much you spend on transportation expenses — monthly parking pass, bus pass, etc. — each pay period.

Estimating your commuter benefits should be easier than, say, trying to guess how many doctor’s visits or prescriptions you’ll need to cover in the coming year. “With a commuter benefit you are making an estimate,” says Joseph Priselac, Jr., CEO P&A Group, a Buffalo, N.Y.-based employee benefits administration company. “As long as you have a job and you know you’re going to keep going to it, you know how much you will spend.”

Step 2: Elect to contribute that amount for the year. The amount you elect will be divided by the total number of remaining pay periods for the year. The benefit will be deducted from each paycheck and placed in your transportation account for your use when you need it. If you change your annual contribution, the remaining number of deductions will be adjusted accordingly to reflect the change. If, for example, you elect $1,200 for the year and are paid monthly, $100 pre-tax will be deducted from your paycheck to your transportation account.

Beware of contribution limits

Commuter benefits: In 2017, the maximum monthly pre-tax contribution limit for commuter benefits is $255, or $3,060 in a year. Moving forward, the IRS may decide to change that limit. The federal agency reviews and sets the limit annually. If you bike to work, you max out at $20 per month.

Parking benefits: An additional $255 per month. If you’ve got to ride mass transit to get to work and pay for parking, Priselac says that limit is technically doubled, since you can max out $255 for parking and another $255 for mass transit passes each month.

Unless you are certain sure you will use up the maximum in transportation spending for the year, don’t simply contribute the maximum amount you can to your transportation benefits account.

What if I want to reduce my contribution?

If, for whatever reason, you decide you don’t need to contribute as much or you want to contribute more to your transit benefit fund during the year, that’s not a problem.

Unlike an FSA, for which your contribution election can’t be changed during the year, “you can change your election anytime you want,” says Priselac.

To clarify, you can change your commuter benefits election as often as your company allows. For some, that may be once per pay period, for others, it may be once per quarter. It’s one of the few benefits you can change mid-year. Consult with your employer’s human resources department to find out how often you are able to change your election.

“If you’re not sure how much you will be spending, start by contributing a small amount,” says Caspar Yen, Senior Director of Product Management at Zenefits, a human resources software company. “There’s no need to over contribute to play it safe.”

That said, if you feel you’ve contributed too much to your commuter benefits account to use up within the period, you can stop the deductions and use up the balance you’ve accumulated until it runs out, then restart your contributions. Just be sure to keep an eye on your transportation benefits balance so you know when to restart your contributions.

What happens to leftover funds at the end of the year?

Transit benefits rollover each year so long as you are still with the company and the company still offers the benefit. That means you don’t have to rush to use leftover funds at the end of the year.

This is in contrast to a flexible spending account, which has a ‘use it or lose it’ rule, which we covered above.

In a sense, there is no ‘plan year’ for transportation benefits, although your company may ask that you confirm you’d like to stay enrolled in the program each year when you elect your annual benefit contributions. Transportation benefits accounts roll over each pay period and should roll over into the coming period at the end of the year. That means there’s no danger of losing any of the money you’ve contributed so far, as long as you remain employed with that particular employer.

What if I quit my job or get laid off?

“As long as you are still working there and you have work related transit expenses the money stays,” says Priselac.

But if you quit your job or are laid off you could lose some or all of the money remaining in your transportation benefits account. If you’ve been over-contributing, any money you don’t use up will be lost to you, and returned to your employer.

The good news is that some benefit programs will give employees a grace period to submit reimbursements requests for any transportation expenses incurred during their employment — even if they quit.

If you know you may no longer be with the company or the company is planning to terminate its program, there’s one thing you can do to save your money.

“Before leaving a company, employees can make a large eligible purchase,” says Yen.

In the Bay Area, for example, an employee can purchase a clipper card with up to $300 in credits. If the transit method you take offers individual tickets, you could purchase a large number. Or, if you are able to load your transit pass with cash, you could place a large amount on your pass.

For example, those in the New York City metro area might load a large amount of money onto their MetroCard and use it up until it’s depleted.

Whenever you’re making a decision about benefits, it helps to talk to your HR department or the benefit provider, just to be sure you understand the rules. Mistakes you make when choosing benefits can end up costing you a lot of money, so ask questions and avoid leaving your decisions to the last minute of open enrollment.

The post How to Maximize Your FSA and Transit Benefit Before You Lose It appeared first on MagnifyMoney.

How to Use Your Health Savings Account (HSA) as a Retirement Tool

Medical expenses are no joke, and that is especially true for consumers saddled with high-deductible health plans (HDHPs). Since 2011, the rate of workers enrolled in HDHPs jumped from 11% to 29%, according to the Kaiser Family Foundation.

For people enrolled in one of these HDHPs, chances are they’re familiar with the HSA, which stands for health savings account. HSAs are useful, tax-advantaged savings vehicles that allow consumers to contribute pre-tax dollars to a fund they can use for out-of-pocket medical expenses.

What HSA users may not realize, however, is that they can also hack their HSA and transform it into a tool for future retirement savings.

Before we explain further, you need to understand how HSAs normally work and who can take advantage of them. From there, you can use a strategy that allows you to use your health savings account as a powerful retirement tool that will help you manage your biggest expense once you retire.

How to Invest Through a Health Savings Account (HSA)

Health savings accounts allow you to contribute a set amount each year. As an individual, you can contribute up to $3,400 for 2017. Families can contribute up to $6,750, and the catch-up contribution for those over 50 allows you to put in an additional $1,000.

The money you contribute is tax free, meaning it reduces your taxable income in the current year. Once your money is in an HSA, you can hold it in cash or invest your savings to increase its earning potential. If you choose to invest, you can explore a variety of options.

But before you get too excited about the possibilities here, remember: not everyone gets access to HSAs. As we noted before, you need to have a high-deductible health plan before you qualify to open one of these accounts, which may or may not make sense for your financial situation.

You don’t have to use the HSA provider associated with your employer’s health insurance company, says Mark Struthers, a Certified Financial Planner and certified public accountant with Sona Financial.

“HSAs are individual accounts that don’t have to go through your employer. You can shop around for the lowest fees and best investment options,” Struthers says. And unlike their close cousin the Flexible Savings Account, HSAs are portable, meaning you can take your HSA with you if you leave the employer you opened it with.

Within the HSA itself, explains Struthers, you also get to choose many types of investments. “In addition to low-risk, savings-type accounts, you can invest in the same type of fixed income and equity mutual funds that may be in your 401(k) or IRA,” he says.

Just like all other investments, protecting against the risk of losing your hard-earned money is an essential step to take. Tony Madsen, Certified Financial Planner and president of New Leaf Financial Guidance recommends taking a hybrid approach.

“I typically advise my clients to leave two years’ worth of the maximum out-of-pocket expenses in cash in their HSAs,” Madsen explains. “Then, we include the rest in investments that are in line with the client’s overall retirement allocation.”

When you’re ready to withdraw your HSA contributions or your earnings, you can do so without penalty — and again without paying tax — anytime, so long as you spend the money on qualified health care expenses.

Examples of qualified expenses include doctor’s fees and dental treatments, vision care, ambulance services, nursing home costs, and even services like acupuncture or treatment for weight loss. It also includes things like crutches, wheelchairs, and prescription drugs (but does not include over-the-counter medications).

Why HSAs Are Great for Retirement Savings

Here’s what makes your HSA such an attractive vehicle for retirement savings:

If you can contribute to your HSA, invest it wisely, and leave the money in the account just like you would leave the money in your 401(k) or IRA until retirement, you can build a sizable nest egg to use specifically on health care costs after you retire.

Not only will you have a fund for medical expenses, but it’s also money you can use tax free!

That’s a big deal, because health care will likely be your largest expense in retirement. Fidelity estimates couples retiring in 2016 can expect to pay up to $390,000 for medical expenses and long-term care during their golden years.

Health savings accounts are designed to help you pay for medical expenses, tax free. No other account offers so many tax advantages for savers.

You can contribute money to the account tax free. Then you can invest that money, and the earnings are also tax free. If you withdraw the money and use it on qualified health expenses, that money is free from tax too.

In addition to the tax advantages, the funds you contribute to an HSA roll over from year to year. That means you don’t have to spend what you saved until you choose to do so.

(This is different from a Flexible Spending Account, where funds are subjected to a use-it-or-lose-it policy. If you don’t spend the money you put into the account by the end of the year, you don’t get it back.)

And health savings accounts aren’t just liquid savings vehicles. You can invest money within them, often within the same kind of mutual or index funds that you might invest in within a Roth IRA or brokerage account.

When It Doesn’t Make Sense to Use an HSA for Retirement Savings

While HSAs can provide a great, tax-free way to save and pay for qualified medical expenses, your priority should be on selecting the best health care plan for your needs first and foremost. If an HDHP makes sense for you, then you can look at using a health savings account.

If you have an HSA already or currently qualify for one, the next step is to consider hacking it to make it work even harder for you. You can transform your account from a good way to manage medical costs into a tool that makes it easier to bear the brunt of your projected retirement expenses.

This strategy may not work if you currently feel overwhelmed with the cost of your health care and need to take advantage of the tax-free savings and spending power today, instead of waiting for retirement.

Because you’re already in a high-deductible health plan if you have an HSA, that also means you are liable for greater out-of-pocket expenses if you seek treatment.

At a minimum, HDHP deductibles start at $1,300 for an individual or $2,600 for a family. Many HDHPs come with deductibles that range upward of $4,000.

Unless you already have an emergency fund with at least enough money to cover the cost of your deductible should you need to pay it, taking on an HDHP can leave you in a bad financial situation if a serious medical concern arises.

Here’s what you need to think about and ask before you switch to an HDHP:

  • Do you expect to spend a lot of money on health care expenses in the next 5 to 10 years? If you’re young and have no health concerns, your expenses will likely be low and manageable.
  • Do you currently have room in your monthly cash flow for occasional unexpected or increased expenses? If your budget can handle a few doctor’s bills here and there, you may be able to handle health care costs with regular income while you’re young.
  • Do you have an emergency fund, and if so, is it fully funded? Would paying your full deductible wipe out that savings? If so, you may want to create a bigger rainy day fund before you take on an HDHP.
  • Will you save on premiums if you switch to an HDHP? Often the higher deductible can provide you with a lower monthly premium, which can help free up more money in your monthly cash flow to pay for health needs as they arise — but that’s not always the case, so compare plans before making decisions.
  • Can you contribute a significant amount to your HSA? Switching to an HDHP just to get an HSA doesn’t make sense if you’re not close to making the maximum contribution to the account each year.

You can also use a tool created by Hui-chin Chen, Certified Financial Planner with Pavlov Financial Planning. She designed a decision matrix where you can input your own financial information and numbers, and see if an HSA makes sense for you based on that information.

If you’re already on an HDHP and like your plan or if you decide you want to switch to one, open an HSA and start saving. At the very least, you can save money tax free, invest it tax free, and use it tax free on qualified medical expenses.

And that’s a great situation, even if you can’t contribute money and leave it in the account all the way until retirement. If you’re able to contribute and let your savings compound until you retire, great! Use your HSA as a retirement tool to help you cover your biggest expected expense in life after work.

“A ‘good’ HSA decision is to have one and use the funds you saved as you need them,” explains Brian Hanks, Certified Financial Planner. “‘Better’ is maximizing your family contribution each year and using the funds as needed. A ‘best’ situation is to maximize your family contribution, not use the HSA account for medical expenses, and treat it as a second 401(k) or retirement account instead.”

The post How to Use Your Health Savings Account (HSA) as a Retirement Tool appeared first on MagnifyMoney.