Apr 2010
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An FSA allows you to make voluntary salary reduction agreements through your employer to provide a tax-advantaged means to pay for both childcare and health care expenses. Many employers, including the Federal government, hold “open season” at this time of year to allow employees to sign up for the program for next year.
With an FSA, you may defer pre-taxed money into an account to reimburse certain predictable expenses, such as childcare or out-of-pocket healthcare expenses. Initially, you benefit from reduced taxes on your take-home pay, much like a 401(k) deferral. But the real benefit is using untaxed income to reimburse expenses like your co-pay on office visits and prescription drugs, eyeglasses, root canals, braces, birth control pills, and even a prescribed stop-smoking program.
Unfortunately, you lose any amount you don’t use each year—it literally gets taken out of your account.
That’s why FSA accounts should be used when you’re sure you have predictable expenses. This is easier to do with childcare, but it’s a tad more difficult with health care expenses. It’s not like you’ll know who’s going to get the flu, develop asthma, or break a leg next year.
However, if you take ongoing prescription drugs, wear contacts, and get regular check-ups, putting aside money on a tax-free basis can help pay for these types of expenses that you would pay for anyway. If you know you or another family member will require an expensive surgery in the upcoming year, you may participate in the plan for one year and choose not to the next.
However, many people find themselves at the end of the year with too much money left in their health care FSA (HCFSA). So now is the time to spend that money on as many qualified expenses as possible in order to use up that account. Load up on contact lenses, get a new pair of eyeglasses, a supply of medications, and even schedule ancillary doctors’ office visits—such as the dermatologist or chiropractor.
Fortunately, the list of qualifying medical expenses is more generous than those covered by insurance plans. In fact, you may use money in your account to pay or reimburse your expenses for:
- Bandages and other medical supplies
- Birth control and pregnancy test kits
- Vision and dental care
- Shipping and handling charges for mail-order prescriptions
- Transportation expenses to and from medical, dental, and vision care visits
- Stop-smoking programs
- Weight loss programs as treatment for a diagnosed diseases such as high blood pressure or heart disease
Since FSA contributions are taken out of each paycheck, your account may not receive all of the funding you can use until the very last paycheck of the year. That’s okay though, because you may spend that amount of money now and request to be reimbursed when the contribution hits your account.
Another plan, the Limited Expense Healthcare FSA (LEX HCFSA) is designed for individuals who are enrolled in or covered under a High Deductible Health Plan (HDHP) in concert with a Health Savings Account (HSA). You may set aside anywhere from a minimum of $250 up to $5,000 in a LEX HCFSA per year.
The LEX HCFSA only covers eligible dental and vision expenses not covered by other insurance, such cleanings, fillings, crowns, orthodontics and denture care products; contacts, glasses, corrective surgery, lens cleaning and soaking solutions. Dental and vision-related cosmetic services are not eligible expenses.
None of the other expenses normally eligible under a “general” health care flexible spending account are eligible under a LEX HCFSA.
As a final note, be sure to re-evaluate the amount of out-of-pocket money you spend on health care in 2009 compared to the amount you contributed to your HCFSA. This will help you more closely predict the amount you should contribute next year.
FYI: Although there has been no federally mandated cap on contributions to date, there are caps proposed in the new health care legislation currently under debate.
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Kara Stefan is a freelance financial writer and author of Head of Household: Money Management for Single Parents. You can find her at Linkedin.com or Kara Stefan Communications.
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