How much money should you put in your FSA?

Quick: Write down how much you’ll spend out of pocket on healthcare next year. Seems impossible, right? After all, you don’t know if a new diagnosis or accident will send your medical costs soaring. You also don’t know if costs you’ve had in the past will go away. And yet, trying to figure out your contributions to a flexible spending account (FSA) means you have no choice but to predict your medical future.

An FSA is a special account you put pretax money into. You use it to pay for certain out-of-pocket healthcare costs, such as copayments, medical bills or a new pair of glasses. FSAs come with an important rule you should know about: When the year ends, you lose any money you haven’t spent.

Because FSAs are offered by your employer, the “use it or lose it” rule varies. Some may offer the choice to roll over up to $550 (an IRS limit). Others may offer a grace period. This would let you use your FSA funds until March 15 of the next year. After that, unspent money would be lost.

Still, it’s worth thinking about an FSA. Because contributions are made pretax, the tax on your income is lower. That could save you hundreds of dollars a year. Which brings us back to predicting your healthcare costs for the year ahead.

To sign up for an FSA, you usually must set your contribution amount at the time of open enrollment. That typically falls between mid-November and mid-December. (There are exceptions, such as starting a new job or getting married or divorced.) Here are a few simple steps to help you figure out your ideal amount.

First, take the chances of unexpected injury or illness out of the picture. Those are impossible to predict, so they shouldn’t be part of your math.

Instead, look at past trends. Then roughly tally what you spend in a normal year on healthcare. Some things to include:

Can’t remember what you spent? Ask your employer if you have a digital health management app such as Wellframe as a benefit. These tools make it easy to check your medical records.

Once you have your total, compare it to the maximum amount the IRS lets you put into an FSA. In 2022, the limit is $2,750 per year per employer.

“Maxing out your contributions is only a good idea if you know you’ll spend that much or more on medical bills during the year,” says Melanie Musson. Musson is a finance expert with U.S. Insurance Agents, an online insurance comparison site. “If you haven’t come close to meeting your deductible in the past few years, you’re better off contributing only a minimal amount.” A deductible is the amount of money you must spend on medical care before your insurance covers its share.

What if you always meet your deductible? You may want to think about maxing out contributions, Musson says. It might lower your paycheck every month. But remember: You’ll be paying for healthcare costs from a tax-free account, not your personal checking account.

“You can’t predict the future. But you can use the past to help you determine how much FSA contributions will serve your family best,” says Musson.

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You might be surprised to learn what you can pay for with your FSA funds. Besides expected items such as new glasses, medical supplies, and prescription medicines, you can use your FSA for:

Knowing which items are eligible can help you with your annual estimate. For the same reason, it’s helpful to know what’s not included, says Musson. You don’t want to rely on FSA funds for items or treatments if they’re not eligible. Some things you can’t use FSA money for include:

Maybe you have eligible elective surgery looming. Examples include laser eye surgery or breast reconstruction after cancer treatment. Or perhaps you’re starting fertility treatments or a stop-smoking program. If you know you’ll have higher medical expenses than usual, you might think about maxing out your FSA contributions, says Musson.

An employer can contribute up to $500 to an employee’s FSA account. Not all do. But it’s worth asking about and factoring that into your own contribution.

Because rolling over your funds is either not allowed or limited, aim low on your target amount if your expenses are minimal, suggests Chris Castanes. Castanes is the president of Surf Financial Brokers, an insurance agency in Myrtle Beach, South Carolina.

“If you have $50 of prescriptions each month and that’s it, then our advice is to only contribute $600 for the year,” Castanes says. “On the other hand, if you have a child who needs braces, then max it out. The upper limit won’t come close to the cost of braces.” The cost of braces starts at about $3000. “In general, it’s better to be safe than lose money.”

Do you have additional questions about how much to contribute to an FSA or HSA? With the Wellframe app, you can find answers to the most common benefits questions. Contact your health plan to see if you’re eligible for Wellframe.