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Kill the Flexible Spending Account

I hope my friends at Save Flexible Spending Plans will forgive me for saying this, but I think it’s time to kill the FSA. Really.

In case you have no idea what I’m talking about, the Flexible Spending Account is an account that lets you take money out of your paycheck, pretax, and get it back when you have a co-pay, or any unreimbursed medical expenses. Prior to 2011, you could also use it for OTC (over the counter) medicine or other first aid products. Now, aside from insulin, you must have a prescription for any medicine you wish reimbursed. Once you have an expense, you need to submit a copy of your bill to your administrator, as companies usually outsource this process, sometime to the insurance company, other times to another company specializing in this. If approved, you get a check in the mail a few weeks later. Sounds like a lot of effort, doesn’t it? Time and effort by both you and the guy reviewing your bills. Somebody is paying for this, and the expense is wasted, spent on paper pushing not on healthcare.

There’s more to this, as if it weren’t complex enough, you have one chance to decide how much money to put in for the year, usually early November the year prior. Your kid needs braces, and you find out in February? Either Junior waits until next January or you miss using your flex account to fund the braces. The spouse need a $1500 root canal? There’s no planning for this. To top it off, any money you don’t spend by the end of the year (plus grace period if your company allows it) is lost. Presumably this offsets those who got back money they never deposited, perhaps leaving the company before the end of the year.

In my daily travels, I frequently find myself driving past Walden Pond, and the above quote comes to mind. With this in mind, I suggest that every change congress wishes to enact to the tax code must always create less code, not more. Instead of creating new accounts, create fewer. With regard to the FSA, kill it, and in its place offer a deduction, even for non-itemizers. The current FSA rules are a disservice to those who may need it most, those with unexpected expenses, and those who are fearful they can’t predict their cost and don’t want to risk losing their deposit.The alternative is the continued tinkering. More rules, more adjustments, more unhappy participants and employers. Stop this craziness. Simplify, simplify, simplify.

Are you a user of the FSA? Have you lost money by not spending your deposits by year end? What do you think of my plan to simplify?


  • Mike January 13, 2012, 9:19 am

    I agree. The other problem, especially prior to 2011, is that money left in Nov or Dec leads to wasteful spending. One year my wife bought prescription sunglasses just to use up our excess funds.

  • Rick January 13, 2012, 10:53 am

    I have used a FSA before and with a 25% marginal federal tax rate I should use it now. However, I dislike it so much I haven’t signed up this year.

  • Sun January 13, 2012, 11:09 am

    Granted, it is hard to say how much you will actually need and can’t adjust the amount unless you have a life event. Having said that, I use ADP’s FlexDirect debit card, so there is no paperwork submission unless they want proof. I keep my FSA receipts only if they want it. Doctor visits and prescriptions are obviously covered. We also shop at WalGreens that pre-code items as FSA. Only eligible products are processed through the debit card and non-eligible FSA items are paid using a different card or cash. I think its a breeze here. Maybe other FSA programs are not as automated as the one I use?

  • JOE January 13, 2012, 11:17 am

    Mike – great point, and tough to actually measure how many dollars are wasted this way.
    Sun – not all plans are as automated. When OTC was permitted, I’d save receipts all year, and if we had any money left near year end, I’d send them in.

  • Augustine January 13, 2012, 2:48 pm


    I agree with your grievances about the FSA and I’d add that its existence perhaps points to a failure of the tax code. However, I wouldn’t go as far as scraping it, but rather scrap the tax code. If anything, the FSA corrects, though in a very timid and imperfect way, distortions that crept in the tax code out of government greed and waste.

    As a matter of fact, I find it preposterous that anything left is forfeited. This is, AFAIK, unique in the tax code and an affront to free men to have the fruit of their labor confiscated for not being spent.

  • Sun January 13, 2012, 2:49 pm

    @Joe – I would argue that FSA is perfectly fine and works well. What you have an issue with is the paper work involved. Granted, you can’t pick and choose how your employer chooses to implement FSA. Let’s kill paperwork! 😉 I’m all for that.

  • JOE January 13, 2012, 2:54 pm

    To be fair, the ‘lost’ money is supposed to offset the losses companies can take on those who spend the full amount (say by June) and then leave. You sign up to hold $5000, and it gets reimbursed as soon as you spend it, Jan 2 ER visit, you get paid back in full. I’m tired of the tinkering, and not a fan of making things more complex. Early next week, a guest post with a view towards keeping the FSA, a great look at the other side.

  • Sally January 13, 2012, 6:08 pm

    Simplicity is bliss. We thought of implementing the FSA with our company, but the paperwork as well as keeping track of individual accounts turned us off to the idea.

    Forced savings would be another option, but workers just don’t want to think of the future, and want as much as they can cash and use right away.

    I would love to see a “hidden” way for us employers to put aside monies for each employee that they can use when their needs exceed their income. For now, what we do is give them a generous SEP IRA contribution every year, invest it for them, and hopefully by the time they are ready to retire, they have a nice big nest egg.

    We all need to learn better spending/saving/investing habits. At least we have the option to invest – which is one option more than the Federal government has.

    Nice post, thanks for all that you do for us in internet space.

    btw, how is that Money Merge company doing? I heard they changed their name or concept.

  • JOE January 18, 2012, 6:02 pm

    Ha! I recognized you, Sally. I’ve not seen much on the Money Merge scam lately. It appears you are correct, I think they sold out. It’s unfortunate this exists in any form, I prefer to see scams done away with altogether, and a few people fined if not sent to jail.

    Back to FSA – It’s tough for small companies, the economy of scale is far less. Maybe Andrew can address this?

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