Flexible Spending Accounts: Better to Overfund than to Underfund?

Oh the whining over FSAs! A Wall Street Journal writer bemoans the ineligibility of over-the-counter meds under the new law and so has decided not to do the FSA. The writer--along with many in the comments section--is also bemoaning the fact that her family overfunded the account. Well! I guess the writer has good benefits. Here in the land of FAMILY of FOUR with NO DENTAL INSURANCE I am happy to have the FSA account available. And while I liked being able to use the FSA for aspirin and cough medicine, I am OK with those very inexpensive items being on the prohibited list.

But what of the overfunding fear? Many of my colleagues--like the commenters in WSJ--don't participate because of that fear.

As you may know, I am an English major. So please point out if my math is flawed. I believe that it is better to overfund than to underfund the account--to a certain point of course.

Here's the math. Because FSAs are tax-free money, the more you make, the more you save. Those in the 28% bracket save more than those in the 15% bracket. These funds are free of state taxes too.

Let's say, you fund for $1000 in expenses. Let's say you are in the pretty low 20% bracket for federal and state taxes.

--If you hit it on the nose, you "really" only paid $800 for the services, since you only net 80% of your incomes.

--If your expenses are $1200, the first $1000 cost you $800 as above. The other $200 (after tax) costs $250 (before tax).

--If your expenses are only $800, then you have in effect broken even. Get another pair of glasses to make up the difference.

--Here's another way to look at it. I have a feeling my math is flawed. The $1000 in FSA costs you $800 (what you would have gotten after after taxes). Using regular, taxed income for the same expenses costs you $1250. So the spread is bigger than one might think. And the spread is magnified if you pay more than 20% in federal and state taxes.

It is easy to anticipate certain expenses: glasses, orthodontia, and the like. The zingers are the sudden pains that signal the incipient root canal. Sadly, we have never overfunded! That is an indicator of our poor benefits.

OK. Can you FIX MY MATH, readers? Please. I keep thinking there is a mistake here.