FSA Archives - KNS Financial

Flexible Spending Account Deadlines: Use it or Lose it!

Recently, we looked at 5 ways you can still increase your 2010 tax return! You’ll notice that using up your entire flexible spending account was listed under additional tips – that is because of the way in which an FSA is structured. For those who have a Flexible Spending Account, you have a limited amount of time to take advantage of it for 2010.

Typically, if your employer allows you to establish a Flexible Spending Account, this is how it looks: You get paid from your job, and BEFORE taxes are calculated, a portion is moved into another account that you use to make medically related purchases (before the applicable deadlines), then taxes are taken out and you receive a net pay.

For many FSA plans, you can only apply medically-related purchases/expenses that occur between January 1 and December 31 of the plan year. Some plans may give you a grace period, where you can use the funds to cover expenses that happen a month or two after December 31, so check with your plan administrator to be sure.

Either way, you do not have much time to drain your account to $0 before the deadline!

What’s the Risk?

The biggest downside to having an FSA is the fact that you are not allowed to carry over unused funds to the next plan year. This “use it or lose it” clause can be difficult to navigate especially since you are not allowed to change your contribution amount (unless you have a qualifying event) during the year.

Before the year starts you have to come up with an estimate of the amount of medical expenses you will have in the next year. And if during the year you realize that your estimate was too high, you will not be able to change it.

That means that if you set aside $2,000 and only spent $1,500 by Christmas, you can’t go back to them and reduce your commitment by $500. You must spend that extra $500 before the deadline, or lose it forever. Actually, the money is returned to your employer in accordance with IRS guidelines.

How Can I Avoid Losing My Money?

Because of the “use it or lose it” clause, the only way to avoid losing your money is to spend it before the deadline passes! Since there will be massive changes to the list of flexible spending account eligible expenses for 2011, my suggestion is to go out and stock up on over-the-counter medication (taking advantage of CVS deals, if you can)!

Another often overlooked option is to submit a claim for all of your medically-related mileage during the plan year. This includes trips to your doctor’s office, hospitals, and even pharmacies to pick up prescriptions!

Also, you should look through your bank records to see if you paid for doctor visits or a similar expense from your bank account; or check grocery and drugstore receipts to make sure you were reimbursed for all eligible expenses.

This post was featured in the following blog carnivals:

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photo by CarbonNYC

Devastating Changes Coming for Flexible Spending Arrangements (FSA’s)

By Khaleef Crumbley

Those of you who have been following my recent CVS shopping trips know that I have a flexible spending account. However, the list of Flexible Spending Account Eligible Expenses will see some major changes for 2011!

How a Flexible Spending Account normally works – before the changes to the list of Flexible Spending Account Eligible Expenses for 2011 – is that one has money taken out of their paycheck to cover medical expenses that their insurance doesn’t pay for – such as deductibles, co-payments and co-insurance, and over-the-counter medicine. This comes out BEFORE taxes, so they automatically get a tax “write-off” for their medical expenses!

For a full explanation of a flexible spending account and to see why I love them so much, please read, our article covering the basics of a flexible spending account.

As far as CVS purchases, I would use my FSA to buy any medically-related item that offered cash back. This way I could get money (ECBs) from CVS without spending a dime from my bank account!

So, what’s changing to the list of Flexible Spending Account Eligible Expenses for 2011?

As part of the Patient Protection and Affordable Care Act (Obamacare) that was signed into law back in March, there will be massive changes to FSAs and HSAs (Health Reimbursement Arrangements).

Effective January 1, 2011 you will no longer be able to be reimbursed for the cost of an over-the-counter drug, unless you get a prescription first!

According to a recent communication from the IRS:

The change does not affect insulin, even if purchased without a prescription, or other health care expenses such as medical devices, eye glasses, contact lenses, co-pays and deductibles.

The new standard applies only to purchases made on or after Jan. 1, 2011, so claims for medicines or drugs purchased without a prescription in 2010 can still be reimbursed in 2011, if allowed by the employer’s plan.

So, if you used your FSA to purchase up on Tylenol, Nyquil, and other OTC drugs, you better stock up by December 31, 2010!

Plan wisely for next year:

When you decide how much to contribute for next year during open enrollment, keep these changes to the flexible spending account eligible expenses in mind – because you will lose any amount not spent by the deadline. I already know that I’m going to contribute a lot less than this year!

Of course, since we now know that the Bush tax cuts are going to be extended, it will be a little easier to plan for 2011. It would also be wise to consider a few of the best investments for 2011, in order to be able to react to any economic or legislative change.

Need more information?

For details on how FSA’s and HSA’s are governed, see Publication 969 , Health Savings Accounts and Other Tax-Favored Health Plans.

To learn more about taxes, please visit KNS Financial’s Tax Guide.

photo credit: CarbonNYC

Flexible Spending Accounts – What Are They and How Do They Work?

By Khaleef Crumbley

Over the last month, I have written about a couple of CVS shopping trips in which I saved a good deal of money by using Extra Care Bucks (ECBs) , CVS coupons & deals, and manufacturer coupons.

In that article I also mentioned that we purchased over-the-counter medicine through our Flexible Spending Account (FSA), in order to get ECBs.

So, what exactly is an FSA? Well, FSA actually stands for Flexible Spending Arrangement – although most people (and companies) refer to it as a Flexible Spending Account (much like an IRA). Very simply, it is a way to pay for medical expenses with pre-tax income.

Normally, when you pay for medical expenses, this is how it goes: You get paid from your job, taxes are taken out, you take the net amount and spend a portion on medicine or copays.

However, if your employer allows you to establish a Flexible Spending Account, this is how it looks: You get paid from your job, and BEFORE taxes are calculated, a portion is moved into another account that you use to make medically related purchases, then taxes are taken out and you receive a net pay.

How a Flexible Spending Account Works:

The great thing about this is that you pay less money in taxes. Here is a concrete example – let’s say you are paid $52,000 per year and are in the 25% tax bracket. Let’s also simplify this further and assume that this is a steady (not marginal) tax rate – meaning you pay 25% of every dollar you make. We will also assume that the 25% represents all FSA-affected taxes.

You make $2,600 in FSA-eligible purchases in a year. Without the Flexible Spending Account, your normal annual pay would be $52,000 minus $13,000 in taxes or $39,000. You would then spend $2,600 out of that $39k and be left with $36,400 to spend on everything else.

However, if you choose to set up a Flexible Spending Account for $2,600, things would look different. You would be paid $52,000 then the $2,600 would be taken out before taxes are calculated and you would be left with $49,400 in taxable income. You would then pay $12,350 in taxes and have $37,050 to spend on all non-medical spending. Then when you needed money for a copay or a prescription, you would then take it from your Flexible Spending Account.

So in this little example, you had the same gross pay, tax rate, and medical expenses, but you are left with more money to spend on other “stuff”. This is one of the reasons why these plans are so popular.

So, what are some of the specifics of a Flexible Spending Account?

Money diverted into a Flexible Spending Account is not charged any federal income, Medicare, or Social Security tax.
Most state and local taxes are charged against this money.
The IRS does not limit the amount that you can put into a Healthcare FSA – however, many employers will set a limit at $5,000 per year.
You can also establish a Dependent Care FSA, but the IRS limits your contributions. These accounts are outside of the scope of this article.
You lose the ability to claim on your income tax return any expenses that you paid for using your FSA.
You lose any money that is not used up by the end of the plan year.
You can use a Healthcare FSA under COBRA.
You cannot change your contribution amount during the year unless you have a “qualifying life event” (such as marriage, birth or adoption of a new child, spouse getting a job, etc).
Only certain expenses are eligible.

How does this affect your tax return?

Normally, you would be able to claim certain medical expenses as a deduction on your taxes. However, since taxes are never taken out of your FSA contributions, any items purchased with FSA money will have to be left off of your tax return. We’ll talk more about this below in the “benefits” section.

The Downsides to a Flexible Spending Account:

But, since you have the ability to buy a wide range of items (even exercise equipment if your doctor suggests it), you can usually find a way to spend the money before the year is out.

Additional Benefits to an FSA:

You Don’t have to Itemize Your Taxes

In order to be able to claim medical expenses on your tax return, you must benefit from itemizing. This means (in most cases) that the total of your itemized deductions must exceed the standard deduction – something that won’t be true for many taxpayers. Even if you are able to itemize your deductions, you still have another hurdle to jump.

The IRS doesn’t even want to hear about your medical expenses unless they are at least 7.5% of your adjusted gross income (AGI)! This means that if your AGI is $50,000 you must have at least $3,750 in medical expenses in order to start counting. That’s right, the IRS only counts expenses OVER 7.5% – meaning that you’ll have to spend $6,350 during the year in order to get a $2,600 deduction!!!

However, with a FSA you only need to spend $2,600 to get a $2,600 deduction, because every penny you put into the account escapes taxation up front!

Get a tax break on a much larger list of items!

Another great benefit of a Flexible Spending Arrangement is that you can get a tax break on many items that you can’t claim on your tax return. On your tax return you can claim copays and coinsurance, deductibles, prescription costs, and other basic medical expenses. Unfortunately, you can’t claim over-the-counter medication, humidifiers, condoms, and other FSA-eligible items.

If you have an FSA, every time you buy Advil, condoms, laxatives, Icy-Hot, and any other medical product, you can pay for it out of your tax-favored account!

No claim forms or reimbursements to worry about!

Also, many FSAs allow you to have a Visa or Mastercard tied to the account, so you can pay for purchases directly out of your FSA! This can save tons of time compared to paying out of pocket and then filing a claim to get reimbursed.

Built in medical budget.

Having a FSA is a great way to establish a budget for your medical expenses. If you know that you will be having certain diagnostic procedures (mammogram, colonoscopy, etc), or must take certain drugs and pay copays for them, or any other medical expense that can be anticipated, you can use the total for your FSA contribution amount.

Reader Questions:

Does your employer offer a FSA? If so, do you take advantage of it?

What is the weirdest FSA purchase that you have made?

Do you have any questions about FSAs?

I look forward to your comments below.

photo credit: Photos8.com