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Flexible spending accounts can stretch your salary
Source:
nola.com
- Nov 1, 2011
It's open enrollment at our office, and I was considering opening a health care flexible spending account, but I heard that some of the rules are changing for this type of account. Can you elaborate on the changes?
In the face of the skyrocketing costs of health care services and insurance coverage, one benefit that can give households some relief is access to a health care flexible spending account. If your family is taking advantage of an FSA, this might be the season when you have to decide how much money to defer from each paycheck toward your FSA. As you make your plans, keep in mind that rules about FSAs are undergoing changes as part of the recently enacted Affordable Care Act.
FSAs allow individuals to set aside pre-tax dollars from their paychecks into an account that reimburses them for qualifying out-of-pocket medical expenses. You can reduce taxable income by using this account for everything from co-pays or deductibles on doctor visits and prescription medicines to Lasik eye surgery and major dental work. The ability to use pre-tax dollars for these expenses is a way to stretch the value of your salary to help you cope with out-of-pocket medical expenses.
If you participate in an FSA, you should be aware of an important change that became effective on Jan. 1. You can't use FSA dollars to offset the costs of over-the-counter drugs unless they are purchased with the authority of a doctor's prescription (there is an exception for insulin). This means you must submit a prescription along with a receipt for the purchase to your FSA provider to be reimbursed for the purchase of over-the-counter medications.
If you are having thoughts about trying to work around this new restriction on the use of FSA dollars, think again. If you use FSA money to purchase non-qualifying medical products or services, the amount will be included in your gross income and you could be subject to an additional penalty tax of 20 percent.
The Affordable Care Act requires employers who offer dependent health care coverage to cover adult children up to age 26. Recently, many employers have started providing more flexibility with FSAs, too. In the past, most employers restricted the use of FSA dollars to costs for dependent children. But now many employers allow the money to be used for an individual's children who will not turn 27 before the end of the year.
Since there is no regulatory limit, many employers allow you to make contributions of up to $5,000 to your health care flexible spending account. If you have major out-of-pocket expenses, such as a child's braces or a specialized surgery that is not covered under your medical plan, you might want to try to schedule them to occur before 2013.
Starting that year, the annual maximum limit you will be able to contribute into your FSA will be $2,500. That will reduce your options on how much pre-tax money will be available to pay for large medical expenses.
The specifics of a plan can vary by employer so be sure to find out how your FSA option works.
John Gin is a certified financial planner in the local office of a national financial services firm. Send questions to Money Watch, The Times-Picayune, 3800 Howard Ave., New Orleans, LA 70125.
Category: IRS
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