Flexible spending accounts can lower tax bills
The pretax account money can be
used to help pay the costs of any caregiver providing services while you're at
work. This includes the nursery school for kids, a day camp during the summer
or the home health aide looking after a disabled spouse.
"Employees are always telling
us $5,000 is a joke," says Linda Wurzelbacher,
president of B.A.S.I.C. Western USA, an employee
benefits administration firm in Tucson, Ariz.
"It's not an amount that kept up with
the times. Anybody with kids will tell you
that they easily exceed this amount in day
care in a year."
Scharin agrees that dependent-care
FSAs tend to get more fully utilized.
"I suppose the IRS
emphasized the medical side because that's where people are more likely to have
dollars left at the end of the year," he says. "I figure that people
who use the dependent care benefit have probably already used up all of the funds
in that account by the year's end."
But if you have $200
sitting in a medical spending account at the end of your benefit year, you
could prevent that money from going to waste. If you pay for medical treatment
from your own pocket within the two-and-a-half months after your use-it-or-lose-it deadline, you can use that FSA money to
cover the costs.
Besides providing more time for running up bills, this
change also allows employees to coordinate two years' FSA contributions
for maximum benefit, says Scharin.
For instance, suppose you
have $200 left in your health care FSA as the year's end approaches. You plan to purchase
new eyeglasses that cost $300. Under the old rules, Scharin points out, you would
purchase the glasses in December, be reimbursed the $200 in your FSA and pay the
$100 balance with your after-tax dollars.
Thanks to the carryover rule, Scharin says you can wait until January to purchase your spectacles and
pay the full $300 cost with pretax FSA dollars. The first $200 of the bill would
come from last year's unused $200; the remaining $100 would come from the new year's FSA contributions.
If you annually put $1,000 in your spending
account, this then would give you a $300 pair of new glasses, paid for
with pretax dollars and leave $900 in your FSA for the rest of the year.
But there is a catch.
is eligible for this extension only if his or her employer amends its FSA document
to permit this grace period," Scharin says.
Employees of companies that make the extended FSA change certainly will welcome the added time to spend leftover money. Medical personnel, no doubt,
also will greet such extensions warmly since it will give them more time during
the traditional year-end holiday season. Previously, the end-of-year treatment
requirement prompted a mad December dash to doctors, optometrists and dentists,
where the insistent refrain of patients declaring, "It's got to be done this
month," was almost as common as the christmas song playing on the waiting-room
Companies, however, might not be as sanguine because
the change could mean costly changes associated with extra administration costs
and employee notification and education efforts.
|-- Updated: March 26, 2009