taxes

FSA saves money, cuts taxes

Coordinating across benefit years

In addition to providing more time for claiming FSA reimbursements, the grace period also allows employees to coordinate two years of 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 carry-over 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.

Not so fast

But there is a catch.

"An employee 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 also will likely 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 songs playing on waiting-room sound systems.

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.

"It will be a little more hassle for the administrators," says Scharin. "The employer basically will be working with two plan years in the same year. But from the public relations side, companies will probably do it."

And just in case you have a medical and dependent-care FSA and were hoping to use the rule change to integrate the benefits, don't even think about it. You can't transfer excess from one account to another that's already been depleted. The IRS specifically warns that "unused amounts elected to pay or reimburse medical expenses in a health flexible spending arrangement may not be used to pay or reimburse dependent care or other expenses incurred during the grace period."

Prescriptions now required

The new health care law that now limits medical FSA contributions also affects which items can be paid for with the account funds.

Since Jan. 1, 2011, FSA owners have had to get a prescription for most over-the-counter medicines or drugs in order for those purchases to be reimbursed. This includes pain relievers, cold medicines, antacids and allergy medications.

However, this new rule does not apply to reimbursements for the cost of insulin, which will continue to be permitted even if the medication is purchased without a prescription.

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