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

John T. Cuddington
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John T. Cuddington: Georgetown University

Game Theory and Information from EconWPA

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.

JEL-codes: D81 I18 (search for similar items in EconPapers)
Date: 1998-02-03
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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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpga:9802001

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