Graduating from college in 2006, I’ve really never had the opportunity to take advantage of some of the benefits that larger corporations and employers have to offer. Before working from home, I was employed at a small-time online company that didn’t have things like retirement plans, flexible spending accounts, or even health insurance! I guess that explains in itself why I no longer work there, but one of the benefits I mentioned that I really never understood was flexible spending accounts. What are they? How would I take advantage? What are the rules?
Defining A Flexible Spending Account
Flexible Spending Accounts (FSA) are accounts that can be used to pay off medical expenses not covered by health insurance. For example, if you had to have surgery and the insurance company only paid for 90% of the costs, the other 10% could be paid-for using this flexible spending account. The benefit of having this type of account is that the money is taken out of your work paycheck pre-tax so the amount of federal and state income taxes you pay will be lessened. There are many rules and regulations that need to be followed in order to participate, so let’s dive right in.
Not everyone has the ability to set up a flexible spending account, and the benefits are not only seen by the employee, but also by the employer. If, and only if, an employer decides to set up an FSA, an employee has the opportunity to utilize it. The employer and employee will meet once a year, usually on January 1st when the plan begins, and decide just how much money is going to be contributed throughout the entire year. While there is no IRS cap on how much money you can contribute tax free, your employer usually does. You might be thinking that you can pick a high number to take the most advantage of the tax break, and while you’re right, you can also be setting yourself up for a disaster. You see, any money that you do not spend when the plan closes out, YOU LOSE! Pretty brutal huh? You didn’t think this tax benefit came without stipulations did you?
The best way I can take you through the ins and outs of a flexible spending account is to lead by example. I love pretending that I have these cool accounts and insurances.
Most enrollment periods for flexible spending accounts begin January 1st. So let’s assume that my back is in terrible condition and I plan on having it treated a lot during the upcoming year. The medical insurance I currently carry will only cover a portion of these treatments, so I decide to open up an FSA for 2010. My employer and I sit down on the 1st and decide that I will contribute $5,000 for the entire year, which will be deducted from each of my paychecks in the appropriate installment amounts. Any time that I want to pay for a medical expense, including my back treatment, I can pay for it using my FSA debit card.
One of the beauties of a flexible spending account from the employee’s perspective is that the entire plan amount is available on the first day (the first day of a contribution). So If I plan to contribute $5,000 and have to spend $4,000 of that a few weeks into the year, I can! Should I be laid off, quit or terminated by my employer, I am not responsible to re-pay those funds. Something to consider for future reference.
Qualifying Purchases for Flexible Spending Accounts
As long as the treatment or medication I receive is allowed under FSA rules, it’s just that simple to utilize. The list of allowable expenses include but are not limited to:
- Co-payments, deductibles and other expenses that are not paid for by your medical and/or dental coverages
- Expenses in excess of the annual or lifetime limits under your medical and dental coverage
- Vision care expenses like contact lenses, contact lens cleaning solution and eyeglasses
- Laser vision or eye corrective surgery
- Hearing aids and batteries
- Prescription drugs not paid for under any medical plan
- Chiropractic services, if not covered by your medical plan
- Special schooling for physically or mentally disabled dependents
- Smoking cessation programs prescribed by a physician
- Weight loss programs to treat a specific disease
Money Left Over In Your Flexible Spending Account
Now let’s say that halfway through the year my back feels so much better that I don’t have to go to the chiropractor any more. That’s great news but I still have $2,000 in my flexible spending account. Most plans will expire on March 15th of the following year (check with your employer because some employers still end plans on December 31st) and if I don’t use the money that’s available, it’s as good as gone. What should I do?
Depending on how much money you have remaining in your flexible spending account, if you have no immediate medical concerns and are running out of time, consider the following:
- Small Amount ($1-$100) – Time to stock up on over the counter medication like Advil, Tylenol, band-aids and ointment creams and lotions.
- Medium Amount ($100-$1,000) - Look to refill expensive prescriptions, buy new contact lenses or eyeglasses … perhaps prescription sunglasses. You can also visit your doctor or dentist for check-ups, blood tests etc.
- Large Amount ($1000+) – Time to treat yourself to some fixing upping. Any needed dental work like crowns, root canals or extractions can be done. Perhaps you can get Lasik eye surgery and dump your current contacts or lenses? With this amount of money left in your FSA, you’ll really want to think hard about how to spend it.
If your employer does allow for you to utilize your FSA until March 15th and you plan to make a purchase after the new year, make sure you use your own funding first, then get reimbursed, otherwise the purchase may account against your current year plan. So again for example, if you have an FSA that started January 1st 2011 and still have $500 in it on March 1st, 2012, you should not use your flexible spending account debit card because the funds will be taken out of your current 2012 plan. Use your own credit and debit card, then submit the receipts to your employer for reimbursement.
Changes To Your Flexible Spending Account
Last but not least, you might be wondering at this point if you are able to change the amount of your FSA plan after the plan has already taken effect. The answer is yes but only if a “qualifying event” occurs in your life. Qualifying events include:
- The addition of an eligible dependent (The birth, adoption or legal guardianship of a new child)
- Marriage or divorce
- The death of a dependent
- Change in dependent care
- A change in your spouses employment status
In order to change your current FSA arrangement, you must apply for new payment terms within 31 days of the qualifying event occurring. If you wait too long, you will not be able to make changes to your current flexible spending account.
Each and every year, if you plan on having medical expenses that exceed your insurance coverage, you should strongly consider utilizing a flexible spending account. Even if you’re an extremely healthy individual you can still put a small amount of money aside for medications and over the counter drugs because the tax benefit from an FSA is just too great to ignore.