Flexible spending accounts

I went to pick up a prescription yesterday, one I’ve been on for a few years, and its price has gone up again.  It goes up about every year.  I know that there are enormous markups on other goods, but the cost of prescription drugs never ceases to amaze me. I have another prescription that costs me $7.00 per pill, and I know that’s not very extraordinary.  There are many drugs that cost way more than that.
The drug companies say that they need to charge so much to recoup their costs for research and development.  I’m sure to some extent that’s true.  However, I used to work in a doctor’s office, and we had lunch bought and delivered to us by a pharmaceutical sales associate (we call them “drug reps”) at least once a week.  And there were 40 employees in the office, so this was no small expense.  All so they could get a few minutes with the doctors to tell them about whatever new drug they had coming out.  Add up all those lunches, and multiply by the number of doctors’ offices in the country, and you get a pretty high number.  And that’s nothing compared to what they did for the doctors – trips to local attractions, with a huge meal and a speaker, all paid for, transportation included if necessary.  Research and development, indeed.
I’m very fortunate; we have really good benefits where we work.  We have a prescription drug plan as part of our health plan.  It’s a three-tiered plan: we pay the least for generics, a medium price for non-generics that are on our list of approved drugs, and the highest price for non-generics that aren’t on the list.  Our highest price, though, still isn’t anywhere near what the cost would be without insurance.  Walgreens prints out the details on their receipts, and it shows how much the insurance saved us.  Usually it’s several hundred dollars on the non-generics.  Amazing.
Fortunately, we have another benefit that also saves us money on prescriptions, albeit indirectly.  We have a flexible spending account, or FSA.  It allows us to pay for our prescriptions with pre-tax dollars, so it means that we pay less income tax overall.  Here’s how it works.  At the beginning of our year, I designate how much I want to put into my FSA in the coming year, based on how much I spent on medicine, supplies, copays, etc. in the previous year.  I fill out a form, and payroll takes a certain amount out of every paycheck to put into the FSA.  Those are pre-tax dollars, which means that my income taxes are figured on a lower salary than they would be without the FSA deduction.  Then I get a card that looks like a credit card in the mail, that can only be used for medical expenses.  I use it to pay for prescriptions and copays, and the payment comes right out of my FSA.  I don’t have to pay and then get reimbursed.  Since the money comes out of my check automatically, I never see it so I don’t miss it.  Using the card feels like getting my prescriptions for free.  Of course it’s not free, but it is tax-free.  When I’ve spent the limit of my FSA, then I have to start paying for things myself.
The trick to using FSAs successfully is to figure out what your expenses are going to be, without going over.  Any FSA money that you don’t spend by the end of the year, you lose.  They don’t reimburse it to you.  But if you don’t put enough into it, then you end up paying your expenses out of your own account with money that has been taxed.  That’s what happened to me last year; I underestimated and ran out of FSA money in January.  So I increased my contribution this year, but I tried to still underestimate just slightly.  The goal is for the FSA to last for as much of the year as possible, but to run out before the year ends.  It can be tricky to calculate.
According to our human resources department, there are a lot of our employees who don’t use the FSA.  (It’s not mandatory.)  They want the extra money in their paychecks, or maybe they’re young and healthy and don’t have any medical expenses.  The thing is, if they want the extra money in their checks, they’re still going to have to pay for their health expenses with part of their income, and that income will have tax taken out of it.  If they use the FSA, it will still be their income, but it will be tax-free.  It really is to everyone’s benefit to use it, if they have any sort of medical expenses at all.  You can also use them on things like first aid supplies, joint supports, and lots of other drugstore items (not vitamins, though).
If you have medical expenses, and you have an FSA benefit that you’re not using, go to your HR department and find out about it.  You can only enroll once a year, but you can get the information about it and be figuring up how much to deduct when the enrollment time comes around.  Using an FSA is practicing good frugality!

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