Make the Most of the New Flex-Account Rules

I know I can no longer use money from my flexible-spending account for over-the-counter drugs without a prescription, but does that mean I’d even need a prescription for things like contact lens solution? I always used FSA money for that. Also, my plan lets me use 2010 money until March 15, 2011. Do the new rules about prescription drugs apply to that money, too?

Even though you can no longer spend FSA money for non-prescription drugs, you can still use the tax-free money for many over-the-counter medical supplies without a prescription, such as bandages, contact lens solution, hearing aids, reading glasses, first aid kits and a variety of other purchases, says Jody Dietel of WageWorks, which administers FSAs for employers. For more information about eligible FSA expenses, see WageWorks’ Save Smart Spend Healthy Web site.

Even though your employer gives you until March 15, 2011, to use up the money in your account from 2010, you can no longer spend the money on over-the-counter drugs without a prescription after December 31, 2010 (other than the medical supplies mentioned above). You need to submit a prescription along with a receipt (or a receipt listing the Rx number) to your FSA provider in order to get reimbursed for the medication from the account.

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If you use your FSA money to pay non-qualifying medical expenses, the amount will be included in your gross income and subject to an additional tax of 20%. But there is a loophole in the law: You can still use the money for over-the-counter drugs as long as you have a prescription for them. So the next time you visit your doctor, ask if you can get a prescription for some of the drugs that you use regularly, such as pain relievers, allergy medications, anti-fungal creams, and cough and cold medicines, recommends Dietel.

Because you have until March 15, 2011, to use your 2010 money, it’s also a good time to think about another strategy for making the most of your FSA: During this time of year, there’s an FSA sweet spot that gives you an extra-large pot of money to use for major medical expenses. You can still use the money remaining in your FSA from 2010 and you can combine it with the entire amount that you’ve designated for 2011, even though you haven’t actually contributed all of the money from your paychecks yet. This pot of money can be particularly helpful for big-ticket items, such as laser eye surgery and major dental work.

To see how much you can save on your taxes by making the most of your flexible-spending account, see our FSA calculator.