Flexible Spending Accounts Provide an Easy Way to Save Money and Pay for Health Care Expenses
One unfortunate result of rising costs associated with health care and health insurance is that employers are now looking for ways to trim employee health benefits. This usually includes increasing co-pays, out-pocket-costs, and deductibles. The good news is that employers are also conscious of the burdens such benefit cutbacks could potentially have and are thus introducing new services to offset the increased costs shouldered by their employees.
Flexible spending account plans are just one such product intended to minimize the strain employees face while their employers transition to a different, more affordable health benefit program for the company. These plans are meant to act as sort of a personal insurance paid for by the employee with the benefit coming in the form of a tax break.
Moreover, in contrast to a health savings account, a flexible spending account is a program through which employees set aside money which they predict will be spent in the upcoming coverage year. Under a flexible spending account plan some predetermined amount of money is automatically deducted from an employee’s pay check and deposited in an account. These funds are then to be spent on a qualifying expense in that same plan year.
More specifically, flexible spending account plans are aimed at partially covering the gap in out of pocket expenses created by higher co-pays and deductibles. The kinds of expenses which may be covered under a flexible spending account plan are limited to health care costs and costs associated with caring for a dependent. Although employees must still assume the responsibility for these increased expenses, under the plan it would be possible for plan members to use pre-tax dollars for some expenses. Generally speaking, the savings when participating in a flexible spending account will be anywhere from about 20-35%.
Joining Your Employer’s FSA
With a flexible spending account employees are given the opportunity each year to opt-in to the plan. Each employee carefully determines how much of his or her salary will be directed to the plan at the beginning of the coverage year. it is It is especially important to estimate your costs wisely because an FSA is a use it or lose it plan and money leftover in the account after the plan year ends will be forfeited.
The funds to be dedicated to the plan are called “benefit elections.” For medical care and dependent fare flexible spending accounts, the coverage period is 12 months, although there may be a brief extension in some plans. Sometimes employers will begin plan benefits at an irregular time of year for the first coverage period with the intent that the first year will be a “short plan year,” and that the next plan year will begin on the normal starting date. In such cases the period of coverage must be the entire short plan year. If employee voluntarily terminates employment during a coverage period they may either forfeit all available funds or discontinue making contributions or they may continue making contributions through the end of the plan year through COBRA. The deadline for qualifying expenses to be used before forfeiture is typically either December 15 or March 15. Employees should seek information from their employers or plan providers to be sure about the correct date. Also, only services which have been performed after the start of the coverage period are reimbursable. Hence, bills or records from before the coverage period are not eligible for reimbursement.
Many, but not all medical expenses are potentially reimbursable from a flexible spending account plan. The expenses which may be excluded from gross pre-tax income according to tax code Section 213 may be reimbursable; however, any expenses reimbursable through any other health care plan of which the employee is a participant may not be reimbursed through a flexible spending account.
Typical reimbursable health care expenses:
- Ambulance services
- Contact lenses
- Eye exams
- First aid supplies
- Lab tests
- Physical therapy
- Mental health expenses
- Smoking cessation
- Substance addiction treatment
Health care expenses generally ineligible for reimbursement:
- Cosmetic surgery for appearance only
- Dental bleaching
- Ear piercing
- Health club memberships
- Life, LTC, or disability insurance premiums
- Marriage counseling
- Massage therapy
- Tattoo removal
- Weight loss treatments (unless specifically prescribed by a doctor)
For more information about expenses which may be reimbursed under a flexible spending account plan, see “Medical and Dental Expenses” which is also known as IRS Publication 502. The document provides an exhaustive list of eligible services and expenses. Expenses which are typically not reimbursable under most plans are generally cosmetic or services and products not usually considered to be health care related.
Despite the fact that the decision to participate in a flexible spending account plan is made annually, in certain circumstances it is possible for plan sponsors to permit employees to alter benefit election requirements. For example, an employee who either marries or divorces during the coverage period may be permitted to alter the amount of his or her salary that must be contributed to the flexible spending account. Other conditions under which the terms of a plan may be changed include a change in the number of dependents and a significant change of residence or work location.
Changes for 2011
Starting January 1, 2011, you will need to be careful when planning your FSA deduction amount because there are changes in what can be reimbursed when it comes to over the counter drugs. In most cases, regular OTC drugs will not longer be eligible, but there are exceptions on insulin for diabetics and if your doctor prescribes a specific OTC drug. So, keep that in mind when making your elections for the 2011 plan year.
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About the Author: Jeremy Vohwinkle is a Chartered Retirement Planning Counselor® and spent a few years working as a financial planner. Today, he helps people make the most of their money by writing about personal finance here and elsewhere on the web. Jeremy is also Coach at Adaptu and a regular contributor for other publications such as Intuit, and American Express. Be sure to follow Jeremy on Twitter or Google+.