Optimal contributions to flexible spending accounts

Neeraj Sood, RAND Corporation
Jayanta Bhattacharya
Michael Schoenbaumb

Abstract

Flexible spending accounts (FSAs) permit tax-free healthcare spending. FSA dollars at year-end are lost. Given no alternative for leftover money, rational consumers spend to zero. Optimal FSA contributions should emphasize tradeoffs between utility from pre-tax medical expenditures and post-tax non-medical consumption.