If you have money left in your 2006 flexible spending account -- and your employer is among the many companies that extended its use-it-or-lose-it deadline to March 15 -- you have just about a month to spend your leftover balance or kiss it goodbye forever.
You can save big by paying for your out-of-pocket health care costs with pre-tax dollars in an FSA. Salary that goes into these reimbursement plans dodges federal income and Social Security taxes, and in most states, state income taxes, too. For example, put $3,000 in an FSA to pay health care bills that you have to pay anyway and you would save more than $1,100 in taxes (assuming a 25% federal brackets, 5% state bracket and 7.65% Social Security tax.
Until recently, employees had until December 31 to spend the money in their FSAs or lose it. But in mid-2005, the Treasury Department issued a notice allowing employers to extend the flexible spending account deadline for up to ten weeks, giving employees until mid-March rather than December 31 to clean out their accounts for the prior year. But it did not require employers to adopt the two-and-a-half-month grace period.
Initially, only about half the companies surveyed by the Deloitte Center for Health Solutions, a consulting firm, extended their deadlines for health-care money. But many more employers adopted the extension last year, says Harris Abrams, RIA Tax Analyst from Thomson Tax & Accounting in New York.
If you're not sure if your employer is one of those offering the FSA extension, ask. "It's absolutely worthwhile for any taxpayer to check with his Human Resources department," says Abrams. "Odds are your company adopted the extension, and there are plenty of ways to spend unused funds before the deadline." Miss the deadline, and your employer gets to keep the leftover money.
Although you can use your health-care FSA for almost any health-related expenses that aren't covered by insurance, including deductibles and co-payments, at this late date you'll want to concentrate on stocking your medicine cabinet, scheduling routine dental and eye exams, and updating eyeglasses, contact lenses and prescription sunglasses. Generally, medically necessary costs qualify. Cosmetic procedures do not. So Lasik eye surgery is covered by an FSA. Liposuction is not. Yes to dental crowns; no to teeth whitening.
Here are two dozen ways to spend your health care FSA dollars:
- Dental work
- Contact lenses
- Prescription sunglasses
- Laser eye surgery
- Psychotherapy, psychiatry, psychology
- Drug and alcohol treatment
- Smoking cessation programs and prescriptions
- Medically necessary cosmetic surgery
- Massage therapy to treat an injury
- Physical therapy
- Speech therapy
- Out-of-pocket expenses for fertility treatments
- Chiropractic care
- Doctor-recommended weight-loss programs
- Hearing aids and batteries
- Medical equipment, such as wheelchairs, crutches or oxygen equipment
- Assistance for the disabled, including guides, Braille books, seeing-eye or hearing-trained animals, note takers, etc.
- Birth control pills, devices and procedures
- Acupuncture or related procedures to treat a medical condition
- Medically necessary prescriptions
- And now you can also use flex funds for medications that don't require a prescription, such as allergy and cold medications, antacids and pain relievers.
Advantages of leftover funds
Having leftover funds from last year can have some advantages. For example, say you have $200 left over from your 2006 account and you plan to buy a pair of prescription glasses that cost $300. You can cover the full cost with pre-tax dollars by submitting a $200 reimbursement claim to cleanout your 2006 account and the remaining $100 cost to your 2007 account, says Abrams. The key is to incur the cost before March 15. Most plans will you allow you an additional few weeks to submit your reimbursement request. Check with your plan administrator for claims processing details and deadlines.
You can apply the same double-up strategy when you're estimating how much to set aside for health-care expenses next year. If, for example, you anticipate an expensive dental procedure early next year, you could combine leftover 2007 funds with 2008 FSA money to cover the entire out-of-pocket cost. One of the key advantages of a health-care FSA is the full amount you allocate for the year is available immediately.
For example, if you contribute $100 a month ($1,200 a year) to a health care FSA in 2008 and then spend $500 on dental work in January that is not covered by insurance, you can get reimbursed for the full $500 in January even though you have not yet contributed that much to the FSA.