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Some FSA money now can be carried over

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.

The 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 accounts.

Claims deadline extended
Now, 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.

The 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.

"The 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."

Federal 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.

However, 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.

Next page: Coordinating across tax years
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