Flexible Spending Account [FSA]: Use It or Lose It

Don't you wish you could claim your morning coffee as an FSA expense?

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. And with the new Obamacare $2,500 cap, I know many people will be considering a shift to using an HSA.

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 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.

If you don’t spend it all, not only to you miss out on the tax savings, but you lose 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.

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. Some companies will allow you to go past 12/31 to actually claim expenses for reimbursement, but you must have spent the money prior to 12/31.

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).

Recent Flexible Spending Account Regulation Changes

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.

The Flexible Spending Account is a great tool. Although becoming less ‘flexible’ due to government regulation, it’s still a great way to save money on medical expenses. Use it or lose it.

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

Image by quinn.anya