Flexible Spending Accounts for dual income households

Scotty342

Level 2 Member
This might be intuitive to some but I certainly had to think through it a bit.

The situation applies as follows: You have dual W-2 income wage earners in your family and one spouse's gross wages is over the income ceiling to be subject to the 6.2% Social Security FICA tax max while the other spouse is under the ceiling.

FSA's are a great tool for saving tax dollars for expenses that you would incur anyway. There a many types of FSA's but this analysis will focus on the two most common: Health FSA and Dependent Care FSA. In 2015, the Health FSA is limited to a $2,500 contribution. Also new for 2015, you can now rollover $500 of unused Health FSA money. Note that in most situations you can't contribute to a HSA and Health FSA, you must choose one. In 2015, the Dependent Care FSA is limited to $5,000. If you have a child in full time daycare you are likely paying this expense anyway and might as well get a tax benefit for it. There is no rollover to the Dependent Care FSA so you use it or lose it.

Let's look at the potential savings with some assumed tax rates. FSA's contributions are not subject to Fed, State and FICA withholding taxes so the savings are as follows:

Max Cont/Federal - 28%/State - 4%*/FICA-SS 6.2%/FICA-Med 1.45%/Total Savings
Dependent Care $5,000/$1,400/$144/$310/$73/$1,927
Health FSA $2,500/$700/$72/$155/$36/$963
Total $7,500/$2,100/$216/$465/$109/$2,890
* Also reduces federal itemized deduction so haircut by 28%

Total Savings - $2,890/7,500 = 38.5%

So best case scenario, you are effectively getting a 38.5% discount on your day care and health care costs up at the annual limit. Now if both spouses plans offer these benefits you might haphazardly sign up for the accounts under the higher earners plan. If the higher earner makes over $118,500 in 2015 gross wages you will pay the maximum FICA-SS tax anyway so you won't get the 6.2% savings (its actually 118,500 + 7500 = 126,000 to lose the entire $465. If you make between 118,500-126,000 you lose money on a sliding scale).

There are no rules that say you have to sign up for your FSA in the same company where you sign up for medical benefits. My company, along with my spouse's company allow us to sign up for FSA even if you don't elect medical insurance benefits with them. Finally, if you make over $250K as a household you are subject to an additional 0.9% medicare tax. This analysis assumes that does not apply.

With a max savings of about 38% depedning on you facts, FSA's are a great way to get an effective discount (up to $5,000 and $2,500 of expenses, respectively) on your child care and healthcare costs. Just make sure to think through this scenario so you don't end up giving the Government 6.2% of the savings back. Every little bit helps!
 

Matt

Administrator
Staff member
This might be intuitive to some but I certainly had to think through it a bit.

The situation applies as follows: You have dual W-2 income wage earners in your family and one spouse's gross wages is over the income ceiling to be subject to the 6.2% Social Security FICA tax max while the other spouse is under the ceiling.

FSA's are a great tool for saving tax dollars for expenses that you would incur anyway. There a many types of FSA's but this analysis will focus on the two most common: Health FSA and Dependent Care FSA. In 2015, the Health FSA is limited to a $2,500 contribution. Also new for 2015, you can now rollover $500 of unused Health FSA money. Note that in most situations you can't contribute to a HSA and Health FSA, you must choose one. In 2015, the Dependent Care FSA is limited to $5,000. If you have a child in full time daycare you are likely paying this expense anyway and might as well get a tax benefit for it. There is no rollover to the Dependent Care FSA so you use it or lose it.

Let's look at the potential savings with some assumed tax rates. FSA's contributions are not subject to Fed, State and FICA withholding taxes so the savings are as follows:

Max Cont/Federal - 28%/State - 4%*/FICA-SS 6.2%/FICA-Med 1.45%/Total Savings
Dependent Care $5,000/$1,400/$144/$310/$73/$1,927
Health FSA $2,500/$700/$72/$155/$36/$963
Total $7,500/$2,100/$216/$465/$109/$2,890
* Also reduces federal itemized deduction so haircut by 28%

Total Savings - $2,890/7,500 = 38.5%

So best case scenario, you are effectively getting a 38.5% discount on your day care and health care costs up at the annual limit. Now if both spouses plans offer these benefits you might haphazardly sign up for the accounts under the higher earners plan. If the higher earner makes over $118,500 in 2015 gross wages you will pay the maximum FICA-SS tax anyway so you won't get the 6.2% savings (its actually 118,500 + 7500 = 126,000 to lose the entire $465. If you make between 118,500-126,000 you lose money on a sliding scale).

There are no rules that say you have to sign up for your FSA in the same company where you sign up for medical benefits. My company, along with my spouse's company allow us to sign up for FSA even if you don't elect medical insurance benefits with them. Finally, if you make over $250K as a household you are subject to an additional 0.9% medicare tax. This analysis assumes that does not apply.

With a max savings of about 38% depedning on you facts, FSA's are a great way to get an effective discount (up to $5,000 and $2,500 of expenses, respectively) on your child care and healthcare costs. Just make sure to think through this scenario so you don't end up giving the Government 6.2% of the savings back. Every little bit helps!
Great post, I hope everyone reads it!

A couple of thoughts- the $500 carryover requires an opt in I believe, while all plans should do so there may be a chance they haven't, certainly worth confirming. I was going to write up a post about this, but I think your intro is better.

While you do mention that you can't have a HSA and a Health FSA I think it is worth highlighting that it seems to be OK to run a Dependent FSA with an HSA, which is a powerful combination.
 

MickiSue

Level 2 Member
Supporter
With an HSA, you can set it up today, go have surgery tomorrow, and when the account has enough funding in it, three years later, reimburse yourself, as well.

Don't forget Coverdales, as well. Open one for your kid, and buy a rental property, as leveraged as possible. Instead of putting money in the account, put the house in, and pay the account your loan service payments. Draw down as needed to cover private school, computers, violin lessons, whatever, and you'll still have enough for college in 18 years. (That one's for Matt, esp.)

Once I find out if Coverdales can be used for attendance for a foreign university, that's how we'll help with our grandson's education.
 

Matt

Administrator
Staff member
With an HSA, you can set it up today, go have surgery tomorrow, and when the account has enough funding in it, three years later, reimburse yourself, as well.

Don't forget Coverdales, as well. Open one for your kid, and buy a rental property, as leveraged as possible. Instead of putting money in the account, put the house in, and pay the account your loan service payments. Draw down as needed to cover private school, computers, violin lessons, whatever, and you'll still have enough for college in 18 years. (That one's for Matt, esp.)

Once I find out if Coverdales can be used for attendance for a foreign university, that's how we'll help with our grandson's education.
Do you mean Coverdell's? The annual limit is $2000 on those... I'd be keen to see a link or two that explains this idea further.

For overseas, a 529 would work in many cases.
 

MickiSue

Level 2 Member
Supporter
Yes, I mean Coverdell. It's late and I'm stupid. I have a Roth with Quest IRA, getting ready to put my first house in it. When I said "as leveraged as possible," I wasn't kidding. They're out of TX. But they also set up Coverdells, HSAs, etc. If you really wanted to, you could buy four $500 violins each year and rent them out for students...the list of things you can purchase inside a tax sheltered account is kind of breathtaking, actually.

Being in TX, these guys have a lot of account owners who put cattle and horses in their Roths.
 

DanR

Level 2 Member
This might be intuitive to some but I certainly had to think through it a bit.

The situation applies as follows: You have dual W-2 income wage earners in your family and one spouse's gross wages is over the income ceiling to be subject to the 6.2% Social Security FICA tax max while the other spouse is under the ceiling.

FSA's are a great tool for saving tax dollars for expenses that you would incur anyway. There a many types of FSA's but this analysis will focus on the two most common: Health FSA and Dependent Care FSA. In 2015, the Health FSA is limited to a $2,500 contribution. Also new for 2015, you can now rollover $500 of unused Health FSA money. Note that in most situations you can't contribute to a HSA and Health FSA, you must choose one. In 2015, the Dependent Care FSA is limited to $5,000. If you have a child in full time daycare you are likely paying this expense anyway and might as well get a tax benefit for it. There is no rollover to the Dependent Care FSA so you use it or lose it.

Let's look at the potential savings with some assumed tax rates. FSA's contributions are not subject to Fed, State and FICA withholding taxes so the savings are as follows:

Max Cont/Federal - 28%/State - 4%*/FICA-SS 6.2%/FICA-Med 1.45%/Total Savings
Dependent Care $5,000/$1,400/$144/$310/$73/$1,927
Health FSA $2,500/$700/$72/$155/$36/$963
Total $7,500/$2,100/$216/$465/$109/$2,890
* Also reduces federal itemized deduction so haircut by 28%

Total Savings - $2,890/7,500 = 38.5%

So best case scenario, you are effectively getting a 38.5% discount on your day care and health care costs up at the annual limit. Now if both spouses plans offer these benefits you might haphazardly sign up for the accounts under the higher earners plan. If the higher earner makes over $118,500 in 2015 gross wages you will pay the maximum FICA-SS tax anyway so you won't get the 6.2% savings (its actually 118,500 + 7500 = 126,000 to lose the entire $465. If you make between 118,500-126,000 you lose money on a sliding scale).

There are no rules that say you have to sign up for your FSA in the same company where you sign up for medical benefits. My company, along with my spouse's company allow us to sign up for FSA even if you don't elect medical insurance benefits with them. Finally, if you make over $250K as a household you are subject to an additional 0.9% medicare tax. This analysis assumes that does not apply.

With a max savings of about 38% depedning on you facts, FSA's are a great way to get an effective discount (up to $5,000 and $2,500 of expenses, respectively) on your child care and healthcare costs. Just make sure to think through this scenario so you don't end up giving the Government 6.2% of the savings back. Every little bit helps!
Hey - thanks for this. I'm sad to say I didn't know that fsa's weren't subject to ss. Having my wife fund the fsa next year is going to save us $155. Every little bit helps!
 

Matt

Administrator
Staff member
Yes, I mean Coverdell. It's late and I'm stupid. I have a Roth with Quest IRA, getting ready to put my first house in it. When I said "as leveraged as possible," I wasn't kidding. They're out of TX. But they also set up Coverdells, HSAs, etc. If you really wanted to, you could buy four $500 violins each year and rent them out for students...the list of things you can purchase inside a tax sheltered account is kind of breathtaking, actually.

Being in TX, these guys have a lot of account owners who put cattle and horses in their Roths.
That's fine, I make typo's etc like that all the time. The reason I asked to clarify was more on the how do you put a house into a Coverdell line of thinking, since it has annual contribution limits of $2000. That's a lot of leverage or a very small house? Can I see some info on that?

And yes, you can put a lot of things into tax sheltered accounts, but that doesn't mean that you should. Real Estate in particular has inherent tax sheltering that is negated by the accounts. And opportunity costs here abound.
 
The only issue with FSA is the ability to forecast medical expenses. Unless somebody has a chronic illness, it's difficult to know what your medical expenses are. There were years when my medical expenses were $100 and other years when it was more than 3K
 

Scotty342

Level 2 Member
The only issue with FSA is the ability to forecast medical expenses. Unless somebody has a chronic illness, it's difficult to know what your medical expenses are. There were years when my medical expenses were $100 and other years when it was more than 3K
Totally agree. The health FSA works well if know large medical are coming in the next year (i.e. Child deliver, major surgery etc) and you dont have an HSA. The dependant care FSA should be an easy decision to max out if your child is in full time care.
 

Scotty342

Level 2 Member
Hey - thanks for this. I'm sad to say I didn't know that fsa's weren't subject to ss. Having my wife fund the fsa next year is going to save us $155. Every little bit helps!
Great! Glad to know it helped someone! I almost did the same thing when electing benefits this year which sent me down this train of thought.
 

cdancer20

Level 2 Member
When I first started working, I made the mistake of choosing health plans and ended up having one that used FSA vs HSA. As a young adult, I didn't really have any health expenses so never a reason to put money in and rarely used my health insurance. Finally when I had to get an expensive dental procedure, I put money in as a guess and it still was nowhere near what I needed. Not to mention I was frantic when it was about to expire and I hadn't had the procedure yet. I ended up having to spend a lot of money on glasses and contacts (which I do use) just to spend that money.

Now I have an HSA in which my company puts money in as well. I never have to worry about losing the money and for someone with little health expenses, if I would have had this when I first started working, I would have a nice bit of money just from company deposits. Not to mention that my annual premium is lower. (Doctors' visits are more but so far that's been paid out of my HSA.) Definitely worth sitting down and looking over all benefits and typical/expected medical expenses before deciding.
 

MickiSue

Level 2 Member
Supporter
Matt, the whole idea of putting houses into Coverdell, Roth IRA, HSA, etc, involves some real estate investing principles. So, for example, if you use the money in the Coverdell to tie down a house, and then wholesale the house to the end investor, the usual "finder's fee" is about $5K. The $5K goes back in the Coverdell. Rinse, repeat a few times, and you have a rental property.

There are other, more complex ways to do it, but I'm just learning, the method I just talked about, wholesaling contracts, is a beginner's way to make money, either in or outside a tax sheltered vehicle.
 

Matt

Administrator
Staff member
Matt, the whole idea of putting houses into Coverdell, Roth IRA, HSA, etc, involves some real estate investing principles. So, for example, if you use the money in the Coverdell to tie down a house, and then wholesale the house to the end investor, the usual "finder's fee" is about $5K. The $5K goes back in the Coverdell. Rinse, repeat a few times, and you have a rental property.

There are other, more complex ways to do it, but I'm just learning, the method I just talked about, wholesaling contracts, is a beginner's way to make money, either in or outside a tax sheltered vehicle.
I looked into this today and I think using the Coverdell is very much putting the cart before the horse. You need to have a very savvy knowledge of what you are doing here, as you are basically trading options and using the shelter to protect gains. This options strategy is unhedged, so it by nature has a high downside, and perhaps high costs to execute.

This is a strategy for sophisticated RE Investors, not a strategy for people who want to provide an education fund for their kids/grandkids IMO.
 

MickiSue

Level 2 Member
Supporter
I looked into this today and I think using the Coverdell is very much putting the cart before the horse. You need to have a very savvy knowledge of what you are doing here, as you are basically trading options and using the shelter to protect gains. This options strategy is unhedged, so it by nature has a high downside, and perhaps high costs to execute.

This is a strategy for sophisticated RE Investors, not a strategy for people who want to provide an education fund for their kids/grandkids IMO.
I will get back to you on this one. I'm taking it slowly; I understand the principles behind it, but I tend to wait till the entire picture percolates through my brain before I act on things...it's the same with this as with MS, LOL. I'd rather miss out on some awesome whatever than jump in with both feet and find out that the bottom fell out, and I'm sinking.
 

madage

Level 2 Member
Technically speaking, it IS possible have both an HDHP/HSA and an FSA, as long as the FSA is "limited-purpose" or "post-deductible". I do not know how many people have access to a limited-purpose FSA, but here's the information from IRS Publication 969:
Other employee health plans.
An employee covered by an HDHP and a health FSA or an HRA that pays or reimburses qualified medical expenses generally cannot make contributions to an HSA. Health FSAs and HRAs are discussed later.

However, an employee can make contributions to an HSA while covered under an HDHP and one or more of the following arrangements.
  • Limited-purpose health FSA or HRA. These arrangements can pay or reimburse the items listed earlier under Other health coverage except long-term care. Also, these arrangements can pay or reimburse preventive care expenses because they can be paid without having to satisfy the deductible.

  • Suspended HRA. Before the beginning of an HRA coverage period, you can elect to suspend the HRA. The HRA does not pay or reimburse, at any time, the medical expenses incurred during the suspension period except preventive care and items listed underOther health coverage. When the suspension period ends, you are no longer eligible to make contributions to an HSA.

  • Post-deductible health FSA or HRA. These arrangements do not pay or reimburse any medical expenses incurred before the minimum annual deductible amount is met. The deductible for these arrangements does not have to be the same as the deductible for the HDHP, but benefits may not be provided before the minimum annual deductible amount is met.
I use my limited-purpose FSA to pay for contact lenses or eyeglasses and non-covered dental expenses. I don't put much in, but every little bit of tax savings helps.
 

Matt

Administrator
Staff member
Technically speaking, it IS possible have both an HDHP/HSA and an FSA, as long as the FSA is "limited-purpose" or "post-deductible". I do not know how many people have access to a limited-purpose FSA, but here's the information from IRS Publication 969:
I use my limited-purpose FSA to pay for contact lenses or eyeglasses and non-covered dental expenses. I don't put much in, but every little bit of tax savings helps.
Yep, I skipped over that because it's narrow, but you are correct regarding one for vision and dental coverage.
 

Scotty342

Level 2 Member
Two more quick thoughts on the Health FSA. This likely won't move the needle on your decision to fund one or not but you should have all the information you can going in.

1) FSA's dollars are elected at the beginning of the year and are available for reimbursement available on Jan 1. If you have a major healthcare expense towards the beginning of the year, you are essentially getting an interest-free loan on that money paid back in each paycheck over the course of the year. With an HSA you would have fund the money out of pocket your HSA has enough money to cover it. Thankfully if you get them, employer contributions to HSA's are often are available for use on Day 1. Check your plan documents for your company's policy.

2) As we know, FSA's are "use it or lose it". However, the inverse is also true as well. If you use it and then leave the company before contributing the elected amount, there is no requirement for you to pay it back. Here is a blog post back in 09 describing an employer who attempted to withhold from the final paycheck. http://well.blogs.nytimes.com/2009/03/23/good-question-flex-spend-funds-after-job-loss/?_r=0 If anyone has any more recent experience please share! Obviously some ethical boundaries to consider if you voluntarily leave after reimbursing large FSA dollars but, since they keep your money if you don't spend it, I could see an argument either way.
 

JoeK

Level 2 Member
One thing to be aware of with the FSA is the list of products that are eligible for purchase with your FSA is pretty staggering - there is a ton of stuff out there that I would not have expected to be approved for FSA purchase. For example, at walgreens.com you can filter their product list to show you everything that is FSA eligible in the store:

http://www.walgreens.com/store/store/category/productlist.jsp?Ne=302&N=4294840275&Eon=4294840275

Things like band-aids, toothpaste, soap, body wash, just to name a few things that I will be stocking up on at the end of this year with my available funds.
 

Kreem

Level 2 Member
The use it or loose it policy for FSA is a real pain. and the FSA eligible medical items that are pretty generic and inexpensive dont ease the pain either.
 

jmw

Level 2 Member
Things like band-aids, toothpaste, soap, body wash, just to name a few things that I will be stocking up on at the end of this year with my available funds.
Despite Walgreen's blessing, some of those items do not sound like FSA eligible items like toothpaste, soap, and body wash. A person without medical conditions would use all of those things. A fluoride paste prescribed by the dentist would work though.

Sadly, I don't find it difficult to drain my FSA without having to go for a Walgreen's shopping spree. That is what happens when you get older.
 

JoeK

Level 2 Member
I wouldn't have thought many of the items would be eligible, either. But Walgreen's and CVS have some sort of arrangement with the companies that run the FSA (or at least they do with mine) - anything they consider FSA eligible gets automatically coded as such at the register, and when I swipe my FSA card, only those items get deducted/paid for, then any other items I have to pay separately. No receipt is required for the FSA for these purchases.
 

rhinodh

Level 2 Member
The only issue with FSA is the ability to forecast medical expenses. Unless somebody has a chronic illness, it's difficult to know what your medical expenses are. There were years when my medical expenses were $100 and other years when it was more than 3K
Here's my sob story for you related to this:

In November 2012, the month of open enrollment for my employer at the time, I selected my healthcare and FSA options for the 2013 year. Being 25 and healthy, I chose the high deductible plan and about $100-200 for the FSA for general doctor appointments, prescriptions, etc. Open enrollment closed November 30.

Saturday, December 1st rolls around. Buddies and I go to play our regularly scheduled Saturday a.m. game of flag football. about 15 minutes into playing, I ruptured an ACL.

And it was one day too late to change my healthcare plan and FSA elections for 2013.

Good luck, huh?
 

rhinodh

Level 2 Member
Also new for 2015, you can now rollover $500 of unused Health FSA money.
the $500 carryover requires an opt in I believe, while all plans should do so there may be a chance they haven't, certainly worth confirming.
Does the rollover take effect in 2015 ($500 of 2015 FSA can rollover into 2016 FSA), or can 2014 funds rollover starting in 2015 ($500 of 2014 funds can rollover into 2016 FSA)?

I have ~$160 in 2014 FSA that hasn't been used, so I'm trying to figure out if I can roll it over or not. Not sure if my FSA is opted in for rollover, though (if 2014 is even eligible).
 

Matt

Administrator
Staff member
Does the rollover take effect in 2015 ($500 of 2015 FSA can rollover into 2016 FSA), or can 2014 funds rollover starting in 2015 ($500 of 2014 funds can rollover into 2016 FSA)?

I have ~$160 in 2014 FSA that hasn't been used, so I'm trying to figure out if I can roll it over or not. Not sure if my FSA is opted in for rollover, though (if 2014 is even eligible).
You must confirm your employer allows this rollover (it's opt in by them) if they don't you can't do it.

It's starting this year and rolls Til March 31st 2015 for 2014 money- you only extend by a quarter.

I'm not sure (but am plotting) if there's a way to make perpetual rollovers- so stick to thinking it's only 90 days or so for now.
 

rhinodh

Level 2 Member
You must confirm your employer allows this rollover (it's opt in by them) if they don't you can't do it.

It's starting this year and rolls Til March 31st 2015 for 2014 money- you only extend by a quarter.

I'm not sure (but am plotting) if there's a way to make perpetual rollovers- so stick to thinking it's only 90 days or so for now.
Thanks for the info. The employer is now my former employer, so I will continue as before.

New employer offers to contribute money to an HSA for me, so I'm going with that now.
 

MarkD

Level 2 Member
Here's my sob story for you related to this:

In November 2012, the month of open enrollment for my employer at the time, I selected my healthcare and FSA options for the 2013 year. Being 25 and healthy, I chose the high deductible plan and about $100-200 for the FSA for general doctor appointments, prescriptions, etc. Open enrollment closed November 30.

Saturday, December 1st rolls around. Buddies and I go to play our regularly scheduled Saturday a.m. game of flag football. about 15 minutes into playing, I ruptured an ACL.

And it was one day too late to change my healthcare plan and FSA elections for 2013.

Good luck, huh?
My company goes through open enrollment at the same time as you did, but the effective coverage date for the new elections is January 1st of the new year. Even though the enrollment period had closed, you were most likely covered for the rest of the year on your previous elections. YMMV.

If you had surgery (large expense) in 2012 then you might have fared better than if it was in 2013. Of course you were still going to be paying the high deductible and co-payments for your rehab well into 2013...
 

rhinodh

Level 2 Member
My company goes through open enrollment at the same time as you did, but the effective coverage date for the new elections is January 1st of the new year. Even though the enrollment period had closed, you were most likely covered for the rest of the year on your previous elections. YMMV.

If you had surgery (large expense) in 2012 then you might have fared better than if it was in 2013. Of course you were still going to be paying the high deductible and co-payments for your rehab well into 2013...
You're right, and I should have been more clear. While the injury occurred in 2012, it wasn't so urgent that it couldn't wait until 2013. I had no other medical expenses towards my $2k deductible in 2012, so I had the surgery in January to meet my deductible at the beginning of the year in case something else happened in 2013 (spoiler alert, it did. busted my eyebrow wide open playing...you guessed it...flag football :eek: but that was just an emergency room visit. I've since learned my lesson on flag football and no longer participate).
 

MarkD

Level 2 Member
I've since learned my lesson on flag football and no longer participate).
I got together yearly with college buddies to play flag football at Thanksgiving. It wasn't bad when we were in our 20's but every year it would take longer, and longer to recuperate. There were a few injuries like you mentioned.

For me it was softball. I got knocked out after I collided with another player resulting in a torn rotator cuff (surgery), a concussion, and some stitches. Another time I tore the ligament in the bottom of my foot away from my heel. :D
 

jmw

Level 2 Member
I wouldn't have thought many of the items would be eligible, either. But Walgreen's and CVS have some sort of arrangement with the companies that run the FSA (or at least they do with mine) - anything they consider FSA eligible gets automatically coded as such at the register, and when I swipe my FSA card, only those items get deducted/paid for, then any other items I have to pay separately. No receipt is required for the FSA for these purchases.
I would be uncomfortable buying these items on the FSA card in case it's caught by the IRS or the FSA administrator to be misclassified as FSA eligible, which will result in a lot of paperwork hassle that outweighs the potential savings on the low priced products.
 
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