A Flexible Spending Account (FSA) is a tax favored benefit that is often misunderstood and underutilized by healthcare consumers. Simply put, participants are granted the ability to use a pre-selected amount of pre-tax (gross pay) dollars to pay for a wide variety of qualified expenses.
The number one reason most eligible employees give for electing not to participate in an FSA is the Use-it-or Lose-it rule. Simply stated, this ruling forces participants to forfeit or lose their remaining funds if they are not utilized for eligible expenses by he end of the plan year or the plan year’s grace period. Obviously, this ruling will force participants to budget wisely. Since you have to choose your contribution amount at the onset of the FSA plan, it is always a good idea to underestimate your eligible expenses for the plan’s upcoming year. With everything from co-payments for medical office visits and prescriptions drugs, to sunscreen, to dental expenses being considered eligible expenses, it should be extremely difficult to have a surplus of FSA funds at the end of the plan year (or plan year grace period).
When budgeting for the amount to place in your FSA for the upcoming plan year, it is extremely wise to consult the information available on your insurance carriers’ member portal for your medical, pharmacy, dental and vision plans. The portals are generally easy to register, navigate and utilize. They will provide you access to the historical claims data and out-of-pocket expenditures for you and your dependents. Once you have eliminated claims associated with high dollar amount claims that are likely not to reoccur (such as a knee surgery), you will be left with a great financial sense of your likely future out-of-pocket.
FSAs run on a plan year which at times, does not necessarily coincide with your medical, pharmacy, dental or vision plan’s plan year. Additionally, a plan year is not often synonymous with a calendar year. Knowing this information will allow you to properly increase or decrease your pre-determined contribution to your FSA. For example, knowing you’re likely due-date in the case of a pregnancy might exemplify a reason to increase your contribution. As another example, by determining if your dependents will reach the limiting age of 27, and will no longer be considered eligible dependents, that might be a reason to decrease your contribution.
Once your plan year is over, it does not necessarily mean that you can no longer incur or submit eligible claims for processing. At the employer’s discretion, FSA plans may, and often do, contain two provisions allowing the program to accommodate both a grace period and a run-out period. A grace period is an additional amount of time subsequent to the end of the plan year (up to 2 1/2 months) for participants to incur eligible claims. A run-out period begins at the end of the plan year or grace period, whichever is later, and allows participants additional time (typically 30 to 90 days) to submit eligible expenses that were incurred during the plan year or grace period.
Most FSA plans allow participants the use of a smart card as opposed to having to pay for and submit a claim in order to be reimbursed. These cards are used in similar fashion to a VISA or Mastercard debit/credit card, and are loaded with the full amount of our pre-determined plan year contribution. How they differ from a standard debit or credit card is they are programmed to only be accepted at the proper vendors and for only the proper eligible expenses. For example, the card will be accepted at a pharmacy, not an electronics store. Additionally, while at the pharmacy, the card will be accepted to pay for your prescribed medication but not the bottle of water or the magazine you also wish to purchase.
An FSA contribution is an opportunity to pay for qualified expenses with pre-tax dollars. This often represents a tax savings of roughly 30% or more. Why not use a 30% off coupon every chance you get? Familiarize yourself with the complete list of qualified expenses. Often overlooked expenses include birth control pills, diabetic test strips, contact lens expenses, dental expenses, feminine care, hand sanitizer, ovulation and pregnancy kits, smoking cessation, fees associated with the transfer of medical records and others.
FSA participants electing a plan year contribution can utilize the full amount of that contribution on the first day of the plan year. Even though participants typically make their FSA contributions periodically in step with their payroll cycle throughout the year, the full annualized amount of the contribution is available on the first day of the plan year. There is no need for a participant to postpone care or use the funds, until the full amount has been contributed. In the event claims are only processed manually with a check reimbursement, the reimbursement will be issued immediately as well.
An FSA is a benefit that can be continued under COBRA. At the point of termination, you will no longer have access to the annualized amount of your contribution but you will have access to the amount you have contributed thus far. In other words, if you planned on making a $2,400 annual contribution and your employment terminated June 30th, you would have contributed $1,200 in pre-tax dollars thus far. To gain further access to those funds, you will need to elect COBRA and continuing making your contribution, now on a post-tax basis, until you exhaust your contributed funds.
Often employers will utilize the services of a third-party administrator to handle the administrative tasks, such as claims payment, associated with an FSA. Valid use of an FSA is contingent upon substantiating FSA usage to be for the payment of qualified expenses. This is a task that is often handled electronically when the FSA program incorporates smart card technology into its plan usage. However, when claims are submitted, processed, and paid manually, participants will often be prompted for receipts or further documentation by the administrator to substantiate valid FSA plan usage.
Many FSA programs also include a DCA or Dependent Care Account. This is an account that allows participants the use of up to $5,000 in pre-tax dollars for dependent care expenses such as nursery school for younger aged children, or adult day care for senior citizens. It is important to note that unlike FSAs, dependent care accounts can only reimburse eligible expenses up to he contributed amount. The full, annualized contribution is not available from day one of the plan year.
FSAs or Flexible Spending Accounts offer a valid and easy vehicle to utilize pre-tax dollars and achieve significant tax savings for common eligible expenses. Given the wide array of eligible expenses, all who find themselves eligible can readily obtain value from participating.
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