Flexible spending accounts can lower tax bills
"It will be a little more
hassle for the administrators," says Scharin. "The employer will basically
will be working with two plan years in the same year. But from the public relations
side, companies will probably do it."
just in case you have both 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.
In the rule announcement, 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."
The treatment deadline extension is the latest effort
by tax officials to make spending plans more attractive. In 2003, the IRS ruled
that over-the-counter drugs can be paid for with flexible spending account
money. Previously, account holders were limited to paying for prescription-only
"Since many prescription drugs have moved
to the over-the-counter market, this action today makes paying for them a little
bit easier to swallow," said then-Treasury Secretary John Snow in making the OTC
Consumers generally were pleased when drugs that
once required a doctor's authorization became available on drug and grocery store
shelves -- until they realized that their work-provided health plans no longer
helped pay for the medications. In many cases, the over-the-counter drug was less
expensive than its prescription predecessor, but patients ended up paying more
because they had to cover the full price and not just a nominal insurance copayment.
Now, the account funds can cover that excess.
pre-approved benefits 'loan'
You also can get to the money even before
it's in your account.
Say you elected to put $2,400
in your medical spending account, with $200
a month coming from each of your 12 paychecks
that year. In early March, your son fell off
his bike and, in addition to breaking his
arm, all his expensive orthodontia had to
be redone. When all the damage was added up,
you faced $950 in deductibles not covered
by your health insurance.
you only had $400 in your account when the accident occurred, federal guidelines
allow you to submit your out-of-pocket expenses immediately for repayment. This
way, you get cash now against the total amount you pledged to pay into the account. On the plan's books, your account will show a deficit that you will "pay off" each month until it's zeroed out and you start accruing reimbursement money again.
Just make sure you know your company's policy if you leave your job before your refill your FSA account. You could see any due amount taken out of your last paycheck.
it or lose it ... later
While the option to give employees more time to use FSA money is welcome, it doesn't change the use-it-or-lose-it component. It just means the possibility of wasting FSA money will simply be deferred. After the two-and-a-half-month extension, any unused money
will be forfeited as before.
|-- Updated: March 26, 2009