Setting up a Flexible Spending Account (FSA)

Tue Feb 12 20:41:06 EST 2013

On Tue, 2013-02-12 at 16:56 -0800, David T. wrote:
> Ross--
> 
> It turns out to be a little more complicated than this. 
Not every feature of the world needs to mirrored in personal finance
software, especially if doing so adds complexity and work.  I'm
suggesting that dispensing with some of the complexity can be helpful.

> As the person behind the discussion that Makai referenced, I can say it's confusing. Especially since I am NOT AN ACCOUNTANT!
> 
> The way that the US has set up Medical FSAs, the individual commits to a dollar amount before the year begins--say $5000. This is a Liability to the individual, since you are committing to pay that $5000. So, at the start of the year, you transfer $5000 from Liabilities:FSA to another account. I've used an Equity account, although I imagine that's wrong. This leaves both with $5000 balances.
My understanding is that if you sign up for $5,000 and you incur $5,000
in expenses on the first day of the plan year, you can get $5,000 right
away.  If you then quit your job, you will never owe the $5,000; you
only owe what has been withheld.

Such a windfall probably needs to be declared somewhere for taxes.
> 
> Each paycheck deduction goes into paying off the liability account (you're paying back the amount you said you'd use), and it should zero out at year end.
> 
> Medical expenditures go from Checking -> Expenses as you note.
> 
> I'm a little fuzzy about the reimbursement side, but when I get a reimbursement check, I transfer from the Equity account to my Checking account. This may or may not be right or right for you. It seems to mostly work for me; if I do things right, then the Equity account zeroes out at year end as well. Well, sort of, since the re-population and the final payouts tend to overlap.
> 
> There are tax reporting complications that this method doesn't seem to work well with--for example, it has never been clear to me the clean way to report the medical expenses that are deductible, that is, the expenses that weren't reimbursed from the FSA. (It doesn't help that most FSAs are run by Insurance companies who do a lot to obfuscate the origination of money they pay to you--is it an insurance payment or an FSA reimbursement). This approach gives you a total medical expense number, which I guess you have to reduce by the reimbursement amounts. I keep thinking there's a better way to handle this…
Expenses reimbursed by FSA (or by insurance) are not eligible for
deduction on taxes, I believe.  I am not a a lawyer or accountant.

Wow, if your FSA provider is your insurance provider and they don't tell
which pot they are reimbursing you out of then you're stuck.

The whole system is just a ridiculous waste of human effort, to go with
the rest of the Rube Goldberg US Healthcare system.  A single
payer/medicare for all would protect people from high medical expenses
without all the games:
1) Health insurance premiums are deductible.  I believe in the future
under ACA (Affordable Care Act--this part might already have kicked in)
there will be limits to this.  Of course, they are also deductible as a
business expense for the employer.  Maybe the limits are just on what
employers can deduct.

2) Large (unreimbursed) medical expenses (> 7.5% AGI) are deductible if
you itemize deductions.

3) Your first $x,000 (the limit is going down) in medical expenses can
be paid with tax free income, but only if you set up an FSA and
accurately predict what your expenses will be.  You lose the money if
you guess too high.  You lose tax savings if you guess too low.  If your
employer has no FSA, you're out of luck.

4) Assuming you use an FSA (item 3), you effectively raise the amount of
expenses you must incur to benefit from the itemized deduction (item 2).
The FSA makes the first part of your expenses effectively
tax-deductible, while the itemized deductions make the last part of your
expenses deductible if they are high enough.

5) For medical providers income is taxable, unless they are non-profit.
The for-profits undoubtedly have a lot of tricks up their sleeve to
avoid taxes too.

There are also plans where you or your employer put money into a cash
account that's combined with high deductible insurance.  Your claims get
paid out of cash and then insurance, and unused funds can accumulate
from year to year (unlike an FSA).  I've never used one and so don't
know the details.

And the rules for exactly what kind of expenses are eligible for
reimbursement under different plans vary.

But I digress!
Ross
> 
> David
> 
> On Feb 12, 2013, at 4:11 PM, Ross Boylan <RossBoylan at stanfordalumni.org> wrote:
> 
> > On Tue, 2013-02-12 at 17:41 -0500, makai wrote:
> >> Hi,
> >> 
> >> Seting up an FSA in GnuCash boggles my mind.  I have these accounts created:
> >> 
> >> Asset:CurrentAccounts:Checking
> >> Asset:CurrentAccounts:FSA
> >> Expense:Doctor
> >> Income:Salary
> >> Liability:FSA
> >> 
> >> The liability can be reduced monthly via a split from my salary.  That makes
> >> sense because I've basically loaned the money to myself and I pay back the
> >> loan over time.
> > I've taken a simpler approach that does not track which expenses have
> > yet to be reimbursed or the maximum available annual benefit (so maybe
> > it's not simpler, since I'm trying to develop a system for that...).
> > I'm using Managing Your Money, but the same principles should apply.  I
> > treat the FSA account as essentially another checking account.
> > 
> > I don't have a Liability:FSA account.
> > 
> > If you get $100 in income, of which $20 goes to the FSA that is
> > Income:Salary 100
> > Asset:Checking 80
> > Asset:FSA      20
> > 
> > When you pay a doctor you incur the medical expense
> > Asset:Checking -50
> > Expense:Doctor  50
> > 
> > When you get reimbursed from the FSA
> > Asset:Checking 50
> > Asset:FSA     -50
> > 
> > If you fail to exhaust the benefit at the end of the year:
> > Asset:FSA 800
> > Expenses:Unused FSA 800
> > 
> > In this approach the FSA balance could go negative for awhile if you use
> > up more of your annual benefit than you have paid in.
> > 
> > Ross
> >> 
> >> But there are two transactions which I don't understand: incurring an
> >> expense and receiving a reimbursement from the FSA.  This thread got me
> >> half-way there, but doesn't answer the question about how track the
> >> reimbursement.
> >> http://lists.gnucash.org/pipermail/gnucash-user/2009-January/027937.html
> >> 
> >> When I incur eligible medical expenses, I would like to transfer them from
> >> Checking to some sort of receivable account.  This will remind me I have
> >> receipts I need to send in (in the same way as do my reimbursable work
> >> expenses; and the similarity of this situation to reimbursable business
> >> expenses is confusing me badly).  Then, when I get reimbursed for the
> >> expenses the money has to end up in a medical expense account, like Doctor,
> >> because at the end of the day, I'm paying out the money.
> >> 
> >> Loaning myself the money (funding the FSA at the start of the term)
> >> Liability:FSA -> Asset:CurrentAccounts:FSA
> >> 
> >> Paying off the loan (monthy)
> >> Income:Salary -> Liability:FSA
> >> 
> >> Incurring an expense
> >> Checking -> 
> >> 
> >> Receiving a reimbursement
> >> Expense:Doctor -> 
> >> 
> >> How do I set up the tree of accounts, and what would the transfers be?
> >> 
> >> -Makai
> >> 
> >> 
> >> 
> >> |\/| /\ |< /\ |
> >> 
> >> makai at digiplasty.com | skype: makai.smith | cell: +1 610 812 9463
> >> 
> >> 
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