New Information About Your Flexible Spending Account [FSA] “Use It or Lose It” Rule

FSA Prescription Drugs

This is our annual reminder about spending your Flexible Spending Account dollars and setting your allotment for next year.

New this year: based on a Treasury Department modification of the “use it or lose it” rule, some employers are allowing $500 to carry-forward from 2013 to 2014. The catch is that the grace period goes away.

Also, keep in mind that some employers don’t allow a grace period into the next year anyway, so December 31st is when you need to do your spending by. This is your cue to contact your benefits department and inquire about your current policy.

Mrs. PT reminded me last night about how we used to sit down and reconcile our medical spending to our flexible spending account reimbursements.

This is a task we used to do annually to ensure we’d used all of our flexible spending account funds.

We no longer do this since we’re self-employed and use a health savings account instead. However, the FSA is still a relevant and useful account for many people.

When we has an FSA, our process was as follows:

  • We would review our current balance,
  • get reimbursements for unclaimed expenses and, if needed,
  • search for ways to use the remaining fund by the end of the year.

Before I delve more into this process, let’s review what a Flexible Spending Account is.

What is a Flexible Spending Account?

With a flexible spending account you determine an amount that you will be using for eligible health and medical expenses for the year. This is capped at $2,500, per Obamacare.

This amount then gets deducted from your paycheck on a pre-tax basis (your gross pay). Not all at once, mind you. It’s divided amongst all of your pay periods for the year. What’s important to realize here is this money isn’t taxed which is why this is such a great benefit (it lowers your adjusted gross income)!

As you incur eligible expenses you can apply to the company that handles your FSA to get the money back. Usually a receipt is used as proof. With my company’s provider I can fill out the form online and upload PDF’s of the receipts. It doesn’t get much easier (check with your HR/Benefits department to learn what your company system is).

A flexible spending account is a nice way to maximize some tax advantages and save more money.

Use it or Lose it

As you know, most flexible spending accounts are “use it or lose it” type plans. You decided at the beginning of the year how much you’d like to contribute, tax-free, to your flexible spending account. Then, you spend the rest of the year dipping into that savings to try and spend it all.

Before the current rule change, if you didn’t spend it all, not only did you miss out on the tax savings, but you lost your remaining funds. Not good! This is obviously the reason anyone talking about flexible spending accounts is going to advise you to be ultra conservative when estimating your spending.

New rule: Thankfully, the rules have been modified and the government is now allowing (if the employer so chooses) $500 of unused funds to roll-over to the next year. Not all employer have implemented this rule change.

Checking the Balance

Most employers use a third-party company to run the employee flexible spending account. My company used PayFlex.com. They had a website where I could sign into my account and review my flexible spending account balance. If I’d spent all of my flexible spending account funds, I could stop at this step. If not, I would need to claim some more spending.

Find Unclaimed Expenses

Have you spent money on qualifying medical expenses this year and not applied for reimbursement for those funds? Well, now is the time to do it.

I used to keep all my receipts from medical expenses in one spot. At this time each year I would sort through those expenses and make sure they are claimed against my flexible spending account funds.

Tip: If you don’t have your receipts, you could just as easily do a search for those expenses using your online bank account. Or, you could connect your bank account to an online aggregator, like Mint.com. The aggregator will help you categorize your spending, making it easier to find unclaimed medical spending.

Don’t let those funds go to waste. Get out there and spend it wisely. And keep this in mind when adjusting your next year’s contributions.

Adjusting Next Year’s FSA Allotment

If you find yourself with too much money in your FSA, maybe it’s time to consider reducing your allotment.

You usually get to adjust your flexible spending account only once a year, when your company has it’s benefits enrollment sign-up. It can be tough to figure out your health expenses but it’s worth the tax advantage.

But what happens if you discover you’re expecting after your enrollment period passes? Your health expenses will most likely be going up and it would be nice to adjust your flexible spending allotment.

You’re in luck!

There are a few situation in which you are allowed to change your election after the enrollment period ends. This includes marriage, divorce, and having a child (or adoption).

Flexible Spending Account Regulation Changes Over the Years

In 2011, as a part of Obamacare, the federal government pulled back a lot of the allowable, eligible expenses that traditionally could be expensed through the flexible spending account.

In the past, you could expense over the counter medicine, and even things like band-aids and sunscreen. That is no longer the case. Now you have to pretty much stick to prescription medicine, glasses and contacts, and hospital and doctor related expenses not covered by insurance.

Additionally, like I mentioned above, Obamacare adds a $2,500 cap limit to the flexible spending account starting in 2013.

Finally, the newest rule change would allow $500 in unused funds to be carried over from 2013 to 2014. Not all employers have implemented the rule, but more are expected, beginning in 2014.

The Flexible Spending Account is a great tool. Although ever changing in terms of its ‘flexibility’ due to government regulation, it’s still a great way to save money on medical expenses. Use it (at least all but $500 now) or lose it.

Can you list any other tips for making the most of your flexible spending account funds?

Image by psyberartist

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Last Edited: December 17, 2013 @ 12:13 pm
About Philip Taylor

Philip Taylor, aka "PT", is a husband and father of two. He created PT Money back in 2007 to share his thoughts on money and to meet others passionate about managing their finances. All the content on this blog is original, and created or edited by PT. Read more about Philip Taylor, and be sure to connect with him on Twitter, Facebook, or view the Philip Taylor+ Google profile.

Comments

  1. Most FSA plans now offer a 2.5 month grace period where you can incur expenses until March 15 of the following year. (i.e. March 15, 2010)

    As a future consideration, please be aware that in the health care reform legislation that looks likely to pass, FSA contributions will be limited to $2,000 and will exclude over the counter drugs. This looks like it will go into effect in 2011.

  2. Excellent contributions, calshana. I checked my own company’s rules and they have a grace period like the one you mentioned. Nice.

    As for the FSA limitations resulting from the health care reform legislation, thanks for pointing it out. Help me understand why those are “reforms”… ??

  3. I’m not a big fan of the “use it or lose it” mentality. I dont want to lose it. not even a little of it.

  4. I got the most for my flexible spending money at Healthwarehouse.com, a mail order pharmacy that also has great prices on over the counter stuff like diabetic supplies. They have free shipping on everything, and also have 90 day supply of generic meds for $9.50 (shipped free). Looks like they are licensed in most states and have cold and flu meds as well. They give away 100 free orders per month, so it’s not only a bargain, there’s a chance I get a free order!

  5. I’m signing up for the FSA at my work for the first time this year. We know we’re going to have quite a few expenses this year due to the fact that we’re having our first child – so why not get some tax benefit!

    Sounds like the company running our plan has it so that you have to submit your expenses via fax, and then wait for a check reimbursement. Seems like an old fashioned way to do it, but oh well.

  6. @Pete – We’ve found that we didn’t do out homework when it came to the cost of delivery and all. We ended up running out and spending quite an amount on over the counter meds, band aids, etc.

    Be careful and set aside a place to keep all those receipts.

  7. ShawnKoehler says:

    Who gets the funds if you do not “use it”. The insurance companies? The government ?

  8. ShawnKoehler says:

    Just completed open enrollment for benefits at work. I use a FSA , a fund to pay uncovered health care cost. Its a “use it or Lose it system” therefore hope my contribution estimates are not too much. Which brings me to wonder, who gets all that “extra” money from those who don’t “use it”?

    • Philip Taylor says:

      @ShawnKoehler The FSA plan administrator keeps the money and uses it for admin expenses or to bolster next years’ fund (entire).

  9. johnythomas says:

    This is a wonderful opinion. The things mentioned are unanimous and needs to be appreciated by everyone.

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  10. Jimmy_Damintz says:

    I am probably going to lose a significant amount of medical contributions as I lost a job in mid year and didnt have the expenses incurred to the point that I left.  Does anyone have any suggestions?

  11. Just an update: as today, November 17, 2012, we can buy band aids and sunscreen using FSA.

  12. I didn’t claim some of my FSA money so now it goes back to my employer. Since I work for a non-profit can I consider that a donation?