Flexible Spending Account, also known as FSA allows an employee to set aside a portion of his or her earnings to pay for qualified expenses, most commonly for medical expenses. Money deducted from an employee’s pay into an FSA is not subject to payroll taxes, resulting in a substantial payroll tax savings. Flexible Spending Account funds must be used by the end of the plan year. Many plans run January 1 – December 31, but check with your human resources department (or the health insurance firm directly) to verify the date that you use all your FSA funds.
Why should you worry about using the funds?
If you fail to use the money in your Flexible Spending Account by the end of the plan year you forfeit that money. Poof! It’s gone.
So what items fall into what category?
A handful of eligible expenses:
- Co-pays to doctors, dentists, etc.
- Allergy medicine
- Lasik and other refractive procedures
- Flu shots
- Guide dog (adoption, training, etc.)
A handful of ineligible expenses:
- Adoption fees
- COBRA premiums
- Diapers
FSA Eligible Expenses Change in 2011
If you have an FSA it is critically important that you know how much, on average, you spend on healthcare during a given year. If you only spend $500 per year then don’t set up the account to be funded with $2,000. You will be scrambling at the end of the year to find qualified expenses, or you’ll end up losing a huge chunk of cash. If you plan to undergo a procedure such as Lasik next year, then you should consider setting up an account with more funds to save on taxes.
In the past if you looked at your FSA account balance on December 28th and noticed it still had money in it you would have time to run down to the drug store and stock up on over the counter cold medicine and pain relievers. Sure you might not use them for several months, but it was better to stock up than to forfeit that money.
Recent changes in healthcare law have changed that. Starting January 1, 2011, you will not be able to use these spending accounts to pay for most over-the-counter drugs and medicines unless you have a doctor’s prescription. You will not need a prescription for insulin and diabetic supplies.
It is already mid-October, check your FSA account balance today and start planning to use those funds up before the end of the year gets here. It’ll be here before you know it!
