When it comes to Flexible Spending Accounts, start with two decisions:
Do you want to participate? Seriously. Would you like your co-payments, deductibles, aspirin, cold medicine, even bandages (think Band-Aids™) covered? For the sake of argument here, say yes.
Would you like to get about a 40% discount on those items?
By using a flexible spending account, you’re using money that hasn’t been taxed.
For example, says Registered Employee Benefit Consultant Ed Zurndorfer, suppose you went to your HMO, and your co-payment is $12. Suppose you’re in a 40% combined tax bracket (federal, state, Social Security, and Medicare part A). The question now is how much would you have to earn so that after the taxes are taken out, you’ll net $12.
Go ahead. We’ll wait.
Give up? The answer is $20. Forty percent of 20 is eight, so $20 after your combined taxes are taken out is the $12 you need for the co-payment.