A flexible spending account (also known as a flex account) allows users to avoid paying taxes on portions of their income. Here is how it typically works:
At the beginning of your 'cycle' (your cycle is when your employer offers re-enrollment in health care services) you have the opportunity to claim an amount that you wish to commit to you flex spending account. If you're not sure if your employer offers this, just ask Human Resources. To start out, it's good to commit a smaller amount, around $1000. After you read this article it will be more clear to you how much you should claim in your account.
So, let's say you commit $1000 to your flex spending account. That $1000 will be taken out of your paycheck throughout the year before the money is taxed. These untaxed funds are then placed into a special account.
Throughout the year, you will need to save all receipts related to health care costs for your immediate family: receipts from deductibles paid to your doctor, for over-the-counter medicines, etc. The items and costs eligible for these programs can change. For instance, some plans will allow some over-the-counter expenses like cough syrup, headache medicine, vitamins etc. Some plans will only allow doctor-related expenses such as prescribed medications and deductible payments. Be sure to check you specific plans to see what items are eligible.
As you collect these receipts, you will periodically need to copy and fax them into your plan provider. The provider will then remove the funds from your account. It's alright if you send in too many receipts, they'll simply take as much out of the account as you have available.
It's also important to note that you do not have to wait until you have enough money taken from your paycheck and put into the account. If you set up the flex account for $1000 and the next day you claim $1000 in eligible expenses it is fine. The money will continue to be deducted from your paycheck over time and you will have avoided taxes on $1000 of your income.
The main concern is that you only commit what you think you will spend in expenses. If you are expecting a new baby then a higher amount is reasonable, if you're single and in average health then you may want to go for a lower amount. If you have any money left over in your account after the cycle has ended, that money is unrecoverable.
Using a flex spending account is a great way to save money and avoid some taxes but be sure to only set aside what you will need since any remaining funds will be lost.