Managing U.S. Flexible Spending Accounts

[David T.]

I thought I would share my insights with the list on handling Flexible Spending Accounts. Most of this will be obvious for accountants, but for me it was not, and I share in hopes it helps someone else!

Flexible Spending Accounts are a U.S. tax option that allow individuals to separate up to $5000 annually from their pre-tax income and use that money to pay off Health or Dependent care costs. The money is usually deducted directly from your paycheck and is deposited in an FSA account. You save by paying for services with pre-tax dollars.

However, the accounts are set up so that if you don't use the money before the end of the tax year (plus a grace period), the money goes to the administrator of the account (Use it or lose it). So it is important to track how much you have spent so far of your FSA dollars and be sure to get it all.

I had set up my FSA accounts as Asset accounts, but always had trouble tracking how much I had left in the accounts, since the grace period meant that some transactions in the current year were actually for the previous year. The solution I have found is to break these accounts into subaccounts by year, which will allow me to see clearly how much remains in each year. The payroll deductions now go into the year for which they apply, as do the expenses. If all goes correctly, there will be a zero balance in the year's account at the end.

Like I said, an accountant probably knows this stuff cold, but for this average user, it was a revelation that I think will simplify these accounts for me.

David