Your FSA is Changing
October 18, 2010
If you are an active user of a medical Flexible Spending Account (FSA), given the new rule changes you need to review your account before year-end. The changes impact what medical expenses you can be reimbursed for and the amount you can contribute.
The Patient Protection and Affordable Care Act was signed into law by President Obama on March 23, 2010. While many provisions are not effective until years from now, an important change to the pre-tax medical reimbursement plan, commonly known as a Flexible Spending Account (FSA), goes into effect January 1, 2011. If you are an active user, there are actions that you need to consider prior to the end of this year.
What is an FSA?
The Flexible Spending Account (FSA) is a popular option for paying medical expenses that are not covered by an employer-provided health insurance plan. As a participant, you contribute pre-tax dollars from each paycheck to the FSA. As medical costs are incurred that are not covered by the insurance plan, you request reimbursement from the FSA. Such costs include the deductible amount for your health insurance, co-pays, prescription and over-the-counter drugs, eyeglasses, contact solution, and other healthcare supplies.
The Flexible Spending Account (FSA) is a popular option for paying medical expenses that are not covered by an employer-provided health insurance plan. As a participant, you contribute pre-tax dollars from each paycheck to the FSA. As medical costs are incurred that are not covered by the insurance plan, you request reimbursement from the FSA. Such costs include the deductible amount for your health insurance, co-pays, prescription and over-the-counter drugs, eyeglasses, contact solution, and other healthcare supplies.
The employer sets the limit on the amount that you can contribute each year. It is generally in the $2,500 to $5,000 range. However, if you do not use all the funds in the account during the calendar year, the funds are forfeited. Some employers may allow a grace period through March of the following year to continue using the previous year’s FSA dollars on eligible expenses. However, the employer’s FSA plan provisions must include this option.
What’s Changing?
- Exclusion of Over-the-Counter Drugs. Starting January 1, 2011, unless your doctor specifically prescribes an over-the-counter drug, it will no longer be considered an eligible expense for reimbursement from your FSA. Since companies can be more restrictive with the reimbursement criteria, you may see your employer limit all non-prescription drugstore purchases such as contact solution, bandages, and other healthcare supplies. This would eliminate the need to sort out which drugstore purchases are eligible and which are not. Your employer should provide more specific guidance prior to the end of this year. (Note: This new exclusion also applies to the other pre-tax medical reimbursement plans: Health Savings Accounts, Archer Medical Savings Accounts, and Heath Reimbursement Accounts.)
- Contribution Amount Limited. Another change for FSAs that becomes effective in year 2013 is the maximum amount that can be contributed to an FSA. Your annual contribution amount will be limited to $2,500. For 2014 and future years, the maximum contribution amount will be increased for inflation. (Note: HSAs, Archer MSAs, and HRAs are not impacted by this contribution maximum.)
What to Do before Year-End?
- Stocking-Up before Year-End. If you use your FSA for purchasing over-the-counter drugs, you may want to stock-up as you use any remaining dollars in this year’s FSA account. To be safe, since the new provision is in effect on January 1st, you may want to make your purchases prior to the end of the year even if your employer’s FSA plan allows a grace period to March.
- Determine 2011 Contribution Amount. Remember that the amount in your FSA is under the “use it or lose it” rule. Therefore, if you have used your FSA for reimbursement for the purchase of over-the-counter drugs in the past, you need to carefully calculate the amount you need in the FSA without the amount normally spent for these items. A second consideration is the limitation on your contribution amount beginning in 2013. Since you may be eligible to contribute more dollars in 2011 and 2012, you may want to consider the higher-cost elective medical expenses that can be completed prior to 2013 when the limit applies. These big-ticket expenses can include orthodontia work for you or your children as well as corrective eye surgery.
Summary
Take the time now to consider your medical expenditures for the rest of 2010 as well as what you may expect to spend for elective medical needs in 2011 and 2012. The appropriate planning will allow you to maximize the tax benefits that your FSA can provide.
Take the time now to consider your medical expenditures for the rest of 2010 as well as what you may expect to spend for elective medical needs in 2011 and 2012. The appropriate planning will allow you to maximize the tax benefits that your FSA can provide.
