How They Work
FSAs may be offered by your employer in addition to your regular health plan. They are also known as cafeteria plans because, just as if you were selecting food from a cafeteria line, they offer you a variety of coverage options.
When you enroll in an FSA, you need to select your healthcare options for the following year during an open enrollment season at the end of the previous year. At that time, you stipulate the amount of money you want deducted from your paycheck every month (before taxes are taken out) and placed into your flexible spending account, which goes toward paying your medical bills during the year.
You choose this amount by predicting the cost of any medical services or products you expect to accumulate over the year, including the cost of things like prescription medicines and therapy. Again, you do not pay taxes on these deductions, and that is where the savings come in. But, it is a use-it-or-lose-it deal. If you do not use all the money, you may forfeit any money that cannot be not rolled over from year to year.
An advantage of FSAs is that you can spend up to the total amount you will be investing for the year (in the form of monthly deductions from your paycheck) before you have actually invested it all.
You need to plan well and stay organized to benefit from a FSA. First of all, you will need to have good records of what you have spent on healthcare over the years so you can make an accurate estimate of how much you will spend over the following year. This is the amount you will be deducting from your paycheck—with no hopes of seeing it again for purposes other than your healthcare. And you cannot change the amount of your monthly deduction until the next open enrollment period, even if you discover you have estimated the wrong amount.
Furthermore, you need to keep track of everything you spend on health services and products and submit all your receipts. The total of these receipts will then be subtracted from your FSA and reimbursed to you. Under some types of flexible spending accounts, you are given a debit card for the account so that you do not have to lay out additional cash, but this still requires you to keep records and remember to use it.