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Optimal Annual Contributions to Flexible Spending Accounts: A Rule-of-Thumb

Author

Listed:
  • John T. Cuddington

    (Georgetown University)

Abstract

This note argues that many employees under-contribute to so-called flexible spending accounts. A simple rule-of-thumb is developed for making optimal contributions (for risk neutral employees): After-tax income net of (uncertain) medical expenditures will be maximized if you contribute to your flexible spending account (FSA) until the probability of not spending the last dollar in your FSA is equal your marginal tax rate.

Suggested Citation

  • John T. Cuddington, 1998. "Optimal Annual Contributions to Flexible Spending Accounts: A Rule-of-Thumb," Game Theory and Information 9802001, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpga:9802001
    Note: Type of Document - WordPerfect; prepared on IBM PC; to print on HP; pages: 5 ; figures: included. Thanks to my colleagues Serge Moresi and Ian Gale, and Lee Snyder of the GU Benefits Office, for helpful comments.
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    Cited by:

    1. Bhattacharya, Jayanta & Schoenbaum, Michael & Sood, Neeraj, 2002. "Optimal contributions to flexible spending accounts," Economics Letters, Elsevier, vol. 76(1), pages 129-135, June.
    2. Cardon, James H. & Showalter, Mark H., 2001. "An examination of flexible spending accounts," Journal of Health Economics, Elsevier, vol. 20(6), pages 935-954, November.

    More about this item

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health

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