Flexible Spending Accounts: Current Usage and Optimal Behavior

• In Event: Health Care Spending and Costs

Abstract

This paper explores how individuals optimally contribute to Flexible Spending Accounts (FSAs). The use-it-or-lose-it provision associated with these accounts introduces risk for users when deciding their contribution amounts. Since users forfeit unused funds, but also reduce their tax liability by contributing, it is unclear whether FSA holders will experience a net gain or net loss from utilizing these accounts. I model this decision-making process to understand the constraints faced by users. I use the Medical Expenditure Panel Survey and find descriptive evidence that (i) FSA users change their contribution behavior over time, (ii) some perceived mistakes in FSA contributions may be due to inexperience, and (iii) forfeitures may happen due to unexpected decreases in medical expenses.

Author

• Catherine Cox, caecox@umich.edu