Client better off paying more taxes

[Dude]

Flex pay cards issued by employers allow you to divert a small portion of your income to a tax free fund. Withdrawals used for medical related purposes remain tax free. Great deal? :

1. Most of the companies running these programs will require users to "prove" that every expense charged meets their definition of a "medical cost". They require users to provide billing statements from the medical provider AND and an explanation of benefits from their insurance company.

2. Any discrepancy must be adjudicated by the taxpayer which often requires hours of discussions with a doctor's receptionist who may have little to no experience with billing, and are thus prone to apply payments erratically. They are also often unable to explain charges which is a problem for the Flex card provider.

3. Here is the big one: If your flex pay provider denies a charge YOU HAVE TO PAY THEM BACK. Think about this. You have $1,000 diverted from your check for medical expenses. You pay a $1,000 medical expense with the flex card. The flex card company denies the charge and then you have to pay back the $1,000. So now you are out $2,0000. The kicker: Only $500 rolls over. So in order to avoid paying approximately $200 in taxes you end up with a myriad of paperwork (especially if that money was used for multiple expense at a provider with poor billing) and potentially losing all the money you put away ( over $500) if you dont use the money in a timely manner. But after having your bill rejected what are you going to do? Go out and look for medical expenses to incur?

I cant believe the best advice for using this type of shelter is to not use it and just pay the tax.

[Rapid Robert]

FSAs area great deal that anyone with even a little financial discipline can take advantage of. Starting with your last objection, if you forfeit some money in the FSA, you don't lose it all, since you already got a 30-40% tax break (fed, state, and FICA tax). You also forgot to mention, even though the full amount of the FSA is deducted ratably over the year, you can start spending it all immediately in January. And, if you should happen to leave the job before year end, you do NOT have to make up the discrepancy.

As for validating the expenses reimbursed, I guess it depends on the servicer. I've been using FSAs for well over 20 years through several employers, and never had a legitimate claim rejected. The current plan either automatically accepts the charge (if through Kaiser, for example), or allows for a simple upload of a PDF of the receipt/statement. All of it is handled conveniently online.

Finally, one thing these accounts work really well for is planned medical expenses. Orthodontia, and other dental work such as crowns can easily be planned for. Plus, for many of us we can always use another pair of prescription eyeglasses & frames, since they don't go bad. Prescription drug copays are also easy to predict and painless to get reimbursed.

There is no sane reason why these types of plans shouldn't be available to everyone, employed or not.

[Dude]

Thank you both. I see your points that Flex pay plans can be beneficial for elective procedures. Sure. If you plan right and only use it for that one expense Flex Plans can be valuable. BUT most of these plans are capped at $2500-$3000. Meaning they are intended and most often used for small things like a check up or a cavity. If it was designed for many small expenses then it should not be so cumbersome to supply the required forms to obtain approval (I know the quick way to do it but I cant say the same for many people I have spoken to). The last three flex plans I have used required every expense to be verified. WHY??

I don't know if I will ever be able to accept the concept of "forfeiture" of this money though. 100% should roll over until it can be used on a larger expense.