Flexible Accounts Get More Flexible
Flexible spending accounts -- always a great deal for people with predictable medical bills -- just got better.
The federal government announced this month that it would loosen the accounts’ “use it or lose it” rules, which have deterred millions of people from contributing. So now is a good time to consider opening a flexible spending account during your employer’s next benefit sign-up period.
Unsure whether they’re right for you or how to proceed? Here are some questions and answers.
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Question: What’s a flexible spending account?
Answer: An FSA is an employer-sponsored savings plan under which the worker decides how much to save each year. The employer then divides that sum by the number of pay periods and diverts the proper amount from each paycheck into a savings account before taxes have been deducted -- much like a 401(k). However, the money is earmarked for medical bills rather than retirement. When the employee has a qualifying medical bill during the year, he can pay it with the savings in his account. In some cases, he can do that with the equivalent of a debit card. In others, he’ll have to pay the bill and be reimbursed by the FSA.
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Q: What’s so great about that?
A: The biggest benefit is the tax break, said Jon Kessler, chairman of WageWorks Inc., a benefits administration firm in San Mateo, Calif. Because you are saving for medical expenses on a before-tax basis, every dollar contributed to the account saves the worker about 40 cents in income taxes and employment taxes, he said.
In addition, the accounts help participants budget for big medical bills. It would be daunting to have to write a $2,000 check for orthodontia that’s not covered by insurance, for instance. But with a flexible spending account, you pay over time through payroll deductions. To set aside $2,000 for the account, about $77 comes out of every two-week check. (And because of the tax breaks, the $77 you’re contributing to the account is reducing your after-tax pay by only about $46.)
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Q: Why are the accounts more attractive now?
A: Until mid-May, every dollar put into the account had to be spent in the year that it was saved. Any money that was left unspent at the end of the year was lost. Surveys conducted by plan sponsors found that this “use it or lose it” provision was the top reason employees didn’t put money into the accounts. Only about 12% of those who qualify for the plans use them, Kessler said.
Under the Internal Revenue Service’s new rules, “use it or lose it” will still apply, but participants will have an extra 2 1/2 months -- until March 15 of the following year -- to use their money. That reduces the chance that participants will forget to spend every dime and, thus, end up losing a portion of their savings.
In the last few years, the government has also loosened the rules about what type of expenses can be reimbursed through these accounts, making the prospect of losing contributions all the more remote. Now, over-the-counter drugs, including aspirin and Band-Aids, qualify for reimbursement. So too can smoking-cessation programs, speech therapy and sometimes weight loss treatments. When the deadline is near, a participant with money left in his account can go to the drugstore and stock up on cold remedies, aspirin and eyeglasses.
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Q: Does everyone have access to flexible spending accounts?
A: No. They are company-sponsored plans, so your employer has to offer one to participate. About 75% of the nation’s workforce has access to an FSA, Kessler said.
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Q: How do you figure out how much money to put in the account?
A: You simply estimate your unreimbursed medical expenses for the year, including deductibles and co-payments.
Realize too that FSAs define medical expenses broadly. Generally speaking, they’ll pay for psychological counseling; dental care; acupuncture; birth control; infertility treatment; laser eye surgery; learning disability treatments; rental or purchase of medical equipment needed to treat a medical condition; medical records charges; the cost to purchase, train and care for a guide dog; and alcohol- or drug-addiction treatments.
The accounts are particularly ideal for those with big planned medical bills, such as orthodontia, or those who have regular out-of-pocket costs for prescriptions.
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Q: Are there any restrictions on how much money you can put in the account?
A: Yes, but the restrictions are determined by employers, not the government. Most employers allow maximum contributions of $2,500 to $5,000 a year.
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Q: What’s the catch?
A: The “use it or lose it” provision remains a detriment, although it’s easily overcome with good planning. The only other possible negative: The rules can vary from plan to plan, just as they can with a 401(k). Before contributing, employees need to ask for details about how their company handles the account. Some companies have restrictions or administrative policies that could make the accounts less attractive.
For instance, some allow you to access FSA money with the equivalent of a debit card. You pick up your prescriptions, swipe the card, and the money’s taken out of your account with no paperwork or hassle. Others require you to pay the bills and fill out forms to get reimbursed -- and they’re not always quick about it.
Some plans warn you if you’re about to lose money to the “use it or lose it” rules, reducing the chance that you’ll forget to spend money that you’ve contributed. Others don’t.
In addition, some plans don’t reimburse for less traditional expenses, such as weight loss treatment.
It makes sense to investigate before you act.
