Setting up a Flexible Spending Account (FSA)

makai makai at digiplasty.com
Tue Feb 12 22:28:41 EST 2013 

Thank you all so much for your helpful replies!  

OT:  This FSA business is indeed a Byzantine mess!  Aside, it also seems to have the "unintended" consequence of encouraging unnecessary medical expenses in the name of saving money.  Reminds me of this Python sketch: http://youtu.be/1ZOdVqlvys0

Here is a mash-up of your good advice -- adding to Budda Buck's detailed list (thanks for that!) an account for outstanding billable expenses and to fund the FSA as if it were an advance on my salary.

## Accounts
Assets:
  Checking
  MedicalExpensesBillable

Expenses:
  EligibleMedicalExpenses

Income:
  FSA_Advance
  Salary

Liabilities:
  FSA_Loan

## Transactions
Fund FSA to Start Term:
  Debit Income:FSA_Advance
  Credit Liability:FSA_Loan

Paycheck: Split:
  Debit Assets:Checking by net salary
  Debit Liability:FSA_Loan by FSA contribution
  Credit Income:Salary by gross salary

Doctor's Visit:
  Debit MedicalExpensesBillable
  Credit Assets:Checking

Submit for Reimbursement:
  Debit Expenses:EligibleMedicalExpenses
  Credit Assets:MedicalExpensesBillable

Receive reimbursement:
  Debit Assets:Checking
  Credit Income:FSA_Advance

Thanks for your help and also thanks to the laudable community of developers who brings us Gnucash!

-Makai

> -----Original Message-----
> From: Ross Boylan [mailto:RossBoylan at stanfordalumni.org]
> Sent: Tuesday, February 12, 2013 8:41 PM
> To: David T.
> Cc: RossBoylan at stanfordalumni.org; makai; gnucash-user at gnucash.org
> Subject: Re: Setting up a Flexible Spending Account (FSA)
> 
> 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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