Can I Start My Own Flexible Spending Account?

People often look for ways to reduce their taxes as well as manage their healthcare expenses. A Flexible Spending account (FSA) is a great way to do both, allowing you to set aside a certain amount of money each week, before taxes, to use toward qualified medical expenses.

Employer Only

• Although FSAs are a cost savings benefit to many people, they can only be started by an employer that chooses to offer these plans as a benefit to its employees. You cannot start your own FSA at a bank or credit union. As of 2011, your employer can determine your maximum allowable FSA contribution, but in 2014, health care reform laws will set the maximum annual contribution at $2500. The pre-tax benefits of an FSA essentially allow you to pay qualified medical expenses at a discount. The drawback is that you must spend all of the FSA contributions in the year in which you made them. Unspent money in the account at the end of the year is forfeited.

Healthcare Savings Account

• A healthcare savings account (HSA) is similar to an FSA in that it allows you to put pre-tax money aside to pay for qualified healthcare related expenses, such as doctor's visits and prescription drugs. Two key differences are that HSAs can be started and maintained by individuals and HSA contributions can be carried over to future years. You can start an HSA as long as you are covered by a qualified high deductible health plan, which as of 2010, is a plan with a minimum deductible of $2,400 for your entire family that requires you to pay no more than $11,900 in out-of-pocket expenses in a year.

Savings Account

• If your employer does not offer an FSA, and you are not covered by a high deductible health policy, you can try a more low-tech solution by opening an account at your local bank or credit union. You can probably transfer money in this account each week automatically with your bank or arrange for direct deposit of a specified amount by your employer. You will not get any tax savings or other tax advantages on this account, but it is a convenient way to budget for healthcare expenses. You can even get a debit card to allow you to pay medical bills from the account.

Medical Expense Deduction

• You can deduct unreimbursed medical expenses that are not paid for from an HSA or reimbursed from an FSA on your federal income taxes. The hitch to this is that the deductions are subject to a 7.5 percent threshold. This means that you can only deduct the amount of expenses that exceeds 7.5 percent of your income. If you made $50,000 per year, you would need to incur at least $3,750 to take a deduction on your taxes; any amount over $3,750 is deductible.