Flexible spending accounts (FSAs) are a good deal because the money you contribute is tax-free and can be used to pay medical expenses all year. The downside is that any money you don't spend disappears at a predetermined cutoff date, usually December 31. (For related reading, also take a look at Healthcare FSAs Increase Your Personal Savings.)
Changes are coming this year as a result of the Patient Protection and Affordable Care Act, passed last March. It establishes a new set of uniform standards for both FSAs and HRAs (health reimbursement arrangements).The changes affect how you can spend the money, how much you can contribute and who is eligible to benefit from the FSA. Understanding how the new law impacts you will help in determining the amount to withhold from your pay.
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- OTC Drugs No Longer Covered
With the exception of insulin, your FSA money can only be used to purchase prescription drugs. Unless you can get your doctor to prescribe the medications you normally buy over-the-counter (OTC), you shouldn't include their cost in your contribution calculations. This includes common items such as cold medicines, aspirin, antacids, pain relievers and allergy medications. It does not include eyeglasses, contact lenses and most medical devices.
In order to get reimbursement, you'll be required to provide a copy of the prescription and receipt. The prescription must comply with all legal requirements of the state where it is filled. If you violate the rules and spend money that doesn't qualify for reimbursement, you will pay income tax on that amount plus an additional penalty of 20%.
Under the old rules, unused contributions in a given year could be rolled over and used to pay expenses through March 15 of the following year. The grace period for all OTC medications has been eliminated for the first two and a half months of 2011.
- Lower Limits Coming
If you are thinking about elective surgery or other expensive procedure, you may want to consider doing it over the next two years. That's because your contributions will be limited to $2,500 in 2013. While prior law imposed no limits, most employers restrict annual contributions to a range of $4,000-5,000. Lowering the limit is one means that Congress will use to increase taxable income and raise funds to pay for other provisions of the new law. You still have the opportunity to build up your FSA during 2011 and 2012 without having to meet the new cap. Use that to your advantage while you can.
- Changes to Dependent Children Rules
If you have a dependent child not covered by your health insurance policy, you can still use your FSA for that child's medical bills. If the child has insurance coverage through another policy such as your spouse's, the FSA can still be used to pay medical costs with the exception of insurance premiums.
The criteria for being classified as a "dependent" have been based on the definition dictated by the Internal Revenue Service for tax purposes. That has been expanded by most employers to include all children under 27, even if they don't live at home and aren't claimed as a tax deduction. (For more information, see Benefits Of A Dependent Care Flexible Spending Account.)
- Rules for Mini-med Plans
Mini-med plans offered by a small fraction of employers and some colleges will be permitted for three more years. These plans offer limited benefits on covered expenses, with an annual ceiling in the range of $25,000-50,000. The ceilings are well below federally-mandated limits of $750,000 in 2011, with even higher limits in the out-years. Beginning in 2014, essential benefits cannot be limited.
In order to facilitate a smooth transition, plan sponsors can request a waiver to those limits through 2013. In addition to supplying complete details on the plan, sponsors must certify that meeting the annual limits would cause a spike in premiums or a significant reduction in plan access.
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What to Do Now
Based on these changes, you should review your contributions and start planning for the future. Now is the time to decide when and if you will schedule medical procedures that will cost more than the new limit taking effect in 2013.
Find out if you can get prescriptions for your most commonly used OTC medications. Some doctors may not do it, or may require a personal visit and charge a fee. Check with your employer to verify the family members who will be able to tap into your FSA account. (For related reading, check out 10 Ways The New Healthcare Bill May Affect You.)
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