|Some FSA money now can be carried over|
Kay Bell Bankrate.com||
Flexible spending accounts, already
a big attraction for workers seeking a tax-smart way to pay some routine expenses,
are getting even more appealing. Account holders could have longer to file spending
account claims, as long as their employers give the OK.
Companies often offer two types of spending
accounts. The most popular is a medical FSA, where a worker sets aside money to
pay items such as health insurance copays, uninsured treatments (for example,
vision care) or even over-the-counter drug purchases. (Sorry, purely cosmetic
surgery doesn't count here.) Some companies also offer their employees a separate
dependent care account to cover the costs of hiring someone to look after a child
or other person who needs supervision while the employee is at work.
money usually is taken out through regular, equal payroll deductions. And in both
cases, the FSA deductions come out of a worker's paycheck on a pretax basis. Because
taxes aren't calculated on the contributions, the actual bite to your paycheck
will be less than the amount you set aside. For example, a $1,000 annual contribution could save you $250 in taxes if you're in the 25 percent bracket.
As helpful as these accounts are, they
have one big drawback: the use-it-or-lose-it requirement that costs workers millions
of dollars each year. Previously, workers had to spend FSA contributions by the
end of the company's benefit year, which in most cases is Dec. 31. Any leftover
account amounts were forfeited. Studies by benefits specialists regularly show
that employees typically forfeit more than $100 each year in flexible medical
Claims deadline extended
however, FSA owners might not lose a single dollar.
In 2005, the Internal Revenue Service loosened the use-it-or-lose-it constraint. Now spending plan participants are allowed to make claims against
their accounts for up to two months and 15 days after the end of their benefit
year. That means employees on a calendar benefit year now can use their 2006 FSA
contributions for expenses incurred as late as March 15, 2007.
The one downside: This is allowed by the ruling, but company's aren't requried to extend their FSA withdrawal periods.
Senate Finance Committee had been pushing the IRS to do something about the use-it-or-lose-it
deadline for years, says Bob D. Scharin, a senior tax analyst at RIA, a publisher of tax guides for accountants. But the IRS response had been that it wasn't sure it had the authority.
IRS approach was that the change is better left to the legislative body,"
says Scharin. "The thing is, when Congress passes a law there's a concern
about revenue neutrality. But it doesn't make a difference in our lives whether
the change is legislative or from an administration rule."
budget concerns aside, the practical results are better for all workers with FSAs.
Medical spending account owners are likely to benefit most from the change, but
the rule also applies to dependent-care accounts.
the reality is that workers rarely have excess care account money at the end of
the benefit year. Individual companies set the limit on how much can be contributed
to a medical account, but there is a firm federal limit of $5,000 on the annual
contribution for dependent-care accounts. This is a family limit, meaning that
even if both parents have access to flexible care accounts, their combined contributions
cannot exceed $5,000.