The rush to spend
FOR some people, a flexible spending account is a tax-free, no-interest loan to pay for laser eye surgery or in vitro fertilization.
For others, it’s money forgotten about until the end of the year, when they scramble for ways to spend thousands of dollars before losing the cash for good. Anything they don’t spend by a certain date will be kept by their employers.
If you’re scurrying to spend last year’s flex money before the deadline, there are many ways to do it. Flexible accounts “are quite popular because they are so easy for employees to use,” said Bob Scharin, editor of Warren, Gorham & Lamont/RIA’s Practical Tax Strategies, a monthly publication for tax professionals.
First, some background: Since the 1970s, employers have offered tax-free funds in which employees can stash a designated sum of money to pay for medical expenses. The money is withdrawn from paychecks throughout the year, but the total amount is available for employees on Jan. 1.
For workers who withdraw the balance but quit before the year is up, their employers eat the difference for what has not been deposited.
But for employees who don’t spend it all, their employer keeps what’s left at the end of the year. That helps offset the costs of those who spend the money and run, but it can infuriate consumers and discourage some from participating in the program, says Paul Fronstin, director of the Health Research and Education Program with the Employee Benefit Research Institute, a nonprofit, nonpartisan research group in Washington, D.C.
The use-it-or-lose-it clause inspired Sen. Charles E. Grassley (R-Iowa) to take action. In 2005, he successfully pushed to extend the deadline for employees to spend flex account money. Now participants have until March 15 of the following year to spend the money. He has also been pushing (unsuccessfully) for the right of workers to roll as much as $500 into the following year’s account.
Stats on how much money employees lose are not easy to come by. At Blue Cross of California, the state’s largest insurer, subscribers with flex accounts set aside an average of $2,000 each year, says spokeswoman Tammy Taylor. Most subscribers spend all the money, but those who don’t usually lose less than $100.
Here’s what to do -- and what to avoid -- when spending your left-over flex money.
* First, check with your employer to learn the final date you can spend flex dollars from 2006. Your employer must OK the March 15 extension for it to apply to your specific plan. Make sure your company gave approval.
* Now, go through that pile of receipts accumulating on your desk or in your wallet. Did you pay for prescription drugs or a co-pay and forget to ask for reimbursement from your flex account? Even if your company did not sign up for the extra time to spend the money, you probably have a grace period for sending in last year’s receipts. Check with your employer to learn when your grace period ends.
* Assuming your company gives you until March 15 to spend 2006 flex dollars, schedule that overdue checkup or dental exam, or take time to get a sports injury examined. Not only can you spend flex money on your co-pay, but you also can take care of your 2007 health plan deductibles too.
* If you wear contact lenses, this is the time to restock. Have your eye on a pricey pair of eyeglass frames? Your flex money can pay for those as well.
* Check the expiration dates on those medicine bottles in your bathroom cabinet. Toss out what’s expired, resupply and pay for the ibuprofen, cough syrup and antihistamines with flex account dollars. Rules changed in 2003 to allow you to buy over-the-counter drugs with flex account money. But be careful: Although medications are covered, vitamins and other supplements are not, unless prescribed by a doctor for a specific illness.
* Have you always wanted to try acupuncture? Flex money will cover that. A trip to your therapist or chiropractor is also eligible, as are laser eye surgery and in vitro fertilization.
* Running might help keep you healthy, but the IRS won’t let you pay for your shoes (or a gym membership) with flex account dollars. However, if you need a special type of shoe to treat a medical condition, that could be covered, Fronstin says.
* Spot’s veterinarian bills don’t qualify for flex account money, either, unless he is your guide dog or helps with other physical disabilities.
* Most cosmetic surgery does not qualify for flex account funds, unless the work is part of recovery from a debilitating disease or traumatic accident: Breast reconstruction surgery qualifies if it follows a mastectomy for cancer. Breast implants do not qualify if you just want to fill out that black dress.
* Don’t grow glum if you can’t find a way to spend all the flex money you set aside. If you spend most of it, you might still end up saving cash. You didn’t pay taxes on the dollars you set aside. So if you fall into the 25% tax bracket, you saved $250 in taxes for every $1,000 you put in your flex account.
“People shouldn’t be overly concerned about forfeiting money,” Fronstin says. Instead, save all your medical expense receipts this year so you can tally them up in December. When you sign up for next year’s flex account, you’ll know better how much to set aside so you don’t lose money again.
Not all of the rules on flex account spending are obvious or seemingly consistent. (Smoking treatment: Covered. Nicotine gum or patch: Not covered.) Carefully check the guidelines, found in IRS publications 502 and 969, for more details. You can find them at www.irs.gov/pub/irs-pdf/p969.pdfand www.irs.gov/pub/irs-pdf/p502.pdf.
