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There are two important times of the year for making check-ups on your health-care Flexible Spending Account. The end of the plan year, usually the calendar year, is one of them (now!), and you employer’s health plan annual open enrollment period is the other.
A quick review of Flexible Spending Accounts might be in order. An FSA is an optional part of a flexible benefits package offered by some employers. In this type of offering, the employee is allowed to contribute pre-tax dollars each pay period for eligible medical expenses, up to a maximum amount per year, determined by the employer. Unlike 401K or other retirement programs, the government does not set the maximum per year on FSA programs, the employer does. The employer may also contribute to the plan, but this is not required. There are other types of accounts often associated with flexible benefit plans such as the Health Savings Account (usually associated with a high deductible health plan) the Medical Savings Account (generally for self employed or certain small businesses) and the Health Reimbursement Arrangement (funded solely by the employer) – these are all beyond the scope of today’s article.
Some advantages of an FSA are:
* Any contributions made by your employer are excluded from your gross income;
* No employment or federal income taxes are deducted from your contributions;
* Withdrawals used for qualified medical expenses may be tax free;
* You can withdraw funds from the account for qualified medical expenses even if you have not yet deposited any funds into the account.
The major disadvantage to an FSA is that it is a “use-it-or-lose-it” program. You must use all of the funds you deposit in the program each plan year or forfeit them. This is because you deposited the funds in the account tax-free and a refund at the end of the year would be considered deferred compensation by the IRS, and that triggers a whole different set of issues.
What is a “qualified medical expense”? The list is long, and you should really check IRS publication 502. The list includes most medically necessary tests and procedures, eyeglasses, exams and contact lens (and solutions), dental cleaning, filling, x-rays, braces etc. (but not whitening), hearing aids and tests, lab fees and even your transportation costs. In addition to the list in that publication, for the purpose of the FSA you may also submit your non-prescription drugs.
This brings us to why now is an important time of year for you to check-up your FSA. Most plan years end with the calendar year, which means you had until 12/31 to incur expenses that could be reimbursed under last year’s FSA. The government allows plans to have a 2 ½ month grace period, but it is up to each plan whether or not to implement the grace period. You need to check with your individual plan to see if you have a grace period to incur additional expenses for last year’s FSA if you still need to.
Regardless of when the expense window closed, you still have to file all of the expense receipts. Gather all of your receipts for expenses that meet the guidelines discussed earlier in IRS publication 502 plus your OTC allowable expenses. Follow your plan’s procedures for submitting your receipts in a timely fashion and be sure to keep a copy just in case of a submission error.
You cannot receive distributions from your FSA for the following expenses.
* Amounts paid for health insurance premiums;
* Amounts paid for long-term care coverage or expenses;
* Amounts that are covered under another health plan.
Go back through all of your receipts and charge card statements and be sure to submit all of your qualifying items to your FSA. Depending on your tax bracket, you are in essence receiving a 15-35% “discount” by buying these items with pre-tax dollars. However, don’t sacrifice your savings by leaving unused funds in your account at the end of the year. Your goal is to spend it all. Anything left in the account at the end of the year is lost money!
In terms of expense timing going forward, remember that you can submit expenses immediately after the plan year begins, regardless of how much you have contributed. You must always be able to submit expenses up to the maximum amount you are going to contribute for the year, regardless of how much you have contributed. You are never going to get any funds back if you have not used them if you reach the end of the year, or if you separate your employment.
The FSA is a great tool to reduce the cost of doctor copays, prescription and OTC drugs, other healthcare items such as dentistry and optical care as well as first aid items since you can pay for all of these things with pre-tax dollars, as well as budgeting them each paycheck. Since you have to pick a deduction amount at the beginning of the plan year and stick with it, be careful about your choice, and be absolutely certain to spend it all.
A quick review of Flexible Spending Accounts might be in order. An FSA is an optional part of a flexible benefits package offered by some employers. In this type of offering, the employee is allowed to contribute pre-tax dollars each pay period for eligible medical expenses, up to a maximum amount per year, determined by the employer. Unlike 401K or other retirement programs, the government does not set the maximum per year on FSA programs, the employer does. The employer may also contribute to the plan, but this is not required. There are other types of accounts often associated with flexible benefit plans such as the Health Savings Account (usually associated with a high deductible health plan) the Medical Savings Account (generally for self employed or certain small businesses) and the Health Reimbursement Arrangement (funded solely by the employer) – these are all beyond the scope of today’s article.
Some advantages of an FSA are:
* Any contributions made by your employer are excluded from your gross income;
* No employment or federal income taxes are deducted from your contributions;
* Withdrawals used for qualified medical expenses may be tax free;
* You can withdraw funds from the account for qualified medical expenses even if you have not yet deposited any funds into the account.
The major disadvantage to an FSA is that it is a “use-it-or-lose-it” program. You must use all of the funds you deposit in the program each plan year or forfeit them. This is because you deposited the funds in the account tax-free and a refund at the end of the year would be considered deferred compensation by the IRS, and that triggers a whole different set of issues.
What is a “qualified medical expense”? The list is long, and you should really check IRS publication 502. The list includes most medically necessary tests and procedures, eyeglasses, exams and contact lens (and solutions), dental cleaning, filling, x-rays, braces etc. (but not whitening), hearing aids and tests, lab fees and even your transportation costs. In addition to the list in that publication, for the purpose of the FSA you may also submit your non-prescription drugs.
This brings us to why now is an important time of year for you to check-up your FSA. Most plan years end with the calendar year, which means you had until 12/31 to incur expenses that could be reimbursed under last year’s FSA. The government allows plans to have a 2 ½ month grace period, but it is up to each plan whether or not to implement the grace period. You need to check with your individual plan to see if you have a grace period to incur additional expenses for last year’s FSA if you still need to.
Regardless of when the expense window closed, you still have to file all of the expense receipts. Gather all of your receipts for expenses that meet the guidelines discussed earlier in IRS publication 502 plus your OTC allowable expenses. Follow your plan’s procedures for submitting your receipts in a timely fashion and be sure to keep a copy just in case of a submission error.
You cannot receive distributions from your FSA for the following expenses.
* Amounts paid for health insurance premiums;
* Amounts paid for long-term care coverage or expenses;
* Amounts that are covered under another health plan.
Go back through all of your receipts and charge card statements and be sure to submit all of your qualifying items to your FSA. Depending on your tax bracket, you are in essence receiving a 15-35% “discount” by buying these items with pre-tax dollars. However, don’t sacrifice your savings by leaving unused funds in your account at the end of the year. Your goal is to spend it all. Anything left in the account at the end of the year is lost money!
In terms of expense timing going forward, remember that you can submit expenses immediately after the plan year begins, regardless of how much you have contributed. You must always be able to submit expenses up to the maximum amount you are going to contribute for the year, regardless of how much you have contributed. You are never going to get any funds back if you have not used them if you reach the end of the year, or if you separate your employment.
The FSA is a great tool to reduce the cost of doctor copays, prescription and OTC drugs, other healthcare items such as dentistry and optical care as well as first aid items since you can pay for all of these things with pre-tax dollars, as well as budgeting them each paycheck. Since you have to pick a deduction amount at the beginning of the plan year and stick with it, be careful about your choice, and be absolutely certain to spend it all.