Saving with FSAs (even if you're healthy)

Until now, I've avoided paying any attention to medical Flexible Spending Accounts (FSAs), a standard benefit available to corporate guppies like me. I lack kids or chronic health issues, the two factors that seem most prone to generating high healthcare bills. I'd never before tracked my annual medical expenses, but I'd bet that in an average year they total less than $200. The use-it-or-lose-it nature of FSAs made them seem more of a hassle than a benefit for casual medical spenders like me.

Then came The Big Hospital Adventure of '06, which has spawned promises of ongoing monthly healthcare expenses and a pile of bills with scary numbers. (Total bill sent to our insurance company for a weeklong stay: $20,484. Twenty thousand dollars. And this was basically a monitoring trip, no surgery or anything intensive like that. Daily shared room and board appears to have cost $1,950 -- for that rate, we could have checked ourselves into the Mandarin Oriental and booked a private nurse. Plus hourly caviar deliveries.) Our insurance eats most of it, but as insurance companies do, Aetna is finding ways to kick a sizable chunk back our way. So, suddenly this FSA idea sounds really appealing.

Especially since I saw the power of taxable income adjustments at work this year with my tuition deduction, which resulted in $4,000 of taxable-income reduction cutting our tax bill by $1,000. If I can use the FSA to reduce our taxable income by a few thousand, that will make a noticeable dent in our taxes and effectively reduce the cost of the whomping bills we'll be getting.

The big danger of FSAs is that you lose any unspent money left in the account at the end of the year. (You have a few months' grace period to actually claim reimbursement, but the expenses all have to be incurred by the end of the calendar year.) They're a bad gamble unless you have a pretty clear idea of at least the minimum you'll be shelling out.

However, there's a less-publicized flip perk I hadn't known about: your employer is required to let you claim reimbursement at any time during the year for the maximum amount you've elected to contribute -- even before you've actually made those contributions. In addition to the tax advantages, you're essentially getting a free credit line.

SmartMoney has a helpful article on FSAs and a benefits calculator. In some ways, the Big Hospital Adventure was well-timed. It came at the start of the year, and just as I'm changing jobs and will have the option to start up an FSA. If we're going to be contributing to the care and feeding of the medical-industrial complex, I'd like to at least wring out whatever financial advantages we can.