Saving Money with a Flexible Spending Account

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As Open Enrollment rolls around for many insurance plans, it's time to consider your coverage. And make sure you are getting the most bang for your buck with a Flexible Spending Account.


What is a Flexible Spending Account (FSA)? A Healthcare Flexible Spending Account, or FSA, is a special account that allows you to set aside part of your pre-tax wages to pay for certain healthcare expenses for you and your family. The account is made available by your employer, and is used to reimburse healthcare expenses not paid for by your health insurance plan.


How does the Healthcare FSA work? You choose how much money you would like to automatically deduct from your paycheck each pay period and put into your separate FSA account. Reimbursement is easy. You can use a debit card (if your employer provides one) to spend the money on eligible expenses. If your employer doesn't provide a debit card, you submit receipts and get reimbursed by check or direct deposit. If your company is set up for it, some of your expenses may be reimbursed without the need to submit claims.


How will an FSA save me money? Because the money you contribute to a flexible spending account is taken out of your paycheck before taxes are taken out, you lower your taxable income, so you’ll pay less taxes on your salary! You are allowed to use these pre-tax funds to pay for qualified healthcare expenses that are not covered by your health plan, such as doctor visit copays, deductibles, prescriptions, dental and vision care expenses, and more. Your entire year’s worth of contributions can also be accessed at the start of the company’s plan year. The national average savings is 15 – 30% on eligible items.


Are there other types of FSAs? Yes, in addition to Healthcare FSAs there are Dependent Care FSAs and Transportation FSA accounts. These are separate spending accounts and you cannot transfer money among these three accounts.


What items are covered by the FSA funds?
Here are some typical examples of FSA-eligible expenses (things that often aren’t paid for by health insurance plans):
• Medical and dental deductibles and co-payments
• Eye exams, contact lenses, and glasses
• Prescription drug co-payments and co-insurance
• Over-the-counter (OTC) products
• Orthodontia or other dental care
• Physical therapy
• Chiropractic care
• Hearing aids

For a complete list click HERE



What happens to the money in the FSA that I don’t use during a year? In the past, the IRS rules said that you had to lose (forfeit) any funds that had not been used by the end of the year (December 31 for most employers). However, in May 2005, the IRS changed the rule to give FSAs an additional 2 months and 15 days in which to incur FSA covered medical costs for reimbursement. (Each company has the option to extend their plan within this new rule or not, though, so check with your plan!)

For example, this means that if you had $200 remaining in your FSA on December 31, the IRS will give you until March 15 of the following year to spend those funds on covered medical expenses. You don't lose the $200 on December 31, and you may spend it, for example, on OTC medicines in January or February. Check with your employer as to whether they have adopted the new 2½ month grace period for FSA expenses under your FSA.

Thanks to MissChele for this reference:
In case anyone asks, that is from notice 2005-42 in the IRS regs "A cafeteria plan document may, at the employer’s option, be amended to provide for a grace period immediately following the end of each plan year."

What can I buy with my FSA funds? In addition to standard healthcare expenses, you can buy aspirin, cough medicine, allergy medication, antacids and many other things that you typically keep on hand for treating what ails you. Many stores now designate FSA eligible products on your cash register receipt.


How much can/should I contribute to my FSA? There are no legal limits on how much money you may contribute to your FSA plan; but your plan sponsor (employer) may set a limit (both minimum and maximum contribution dollars). You will want to estimate your eligible expenses to figure out the right contribution for you or your family. Because you lose any unused FSA funds, one you should consider it carefully. McNeil, a company that makes many FSA-eligible over-the-counter medicines, provides this calculator to help you determine how much you should deposit in your flexible spending account. Your plan administrator may provide a similar tool.


When can I sign up for an FSA? FSAs are offered through your employee benefits and you can typically sign up only during your annual open enrollment period. If you are a new employee, you may be able to enroll outside the annual open enrollment period. Check with your employer’s benefits department for more details.


How do I pay for healthcare expenses with my FSA funds? Some plans provide an FSA debit card that scans at the register. The money will automatically be deducted from your FSA account. Other employer plans require you to submit a claim to receive reimbursement from your FSA account.


When can I start using the money in my FSA account? You can access your entire year's worth of contributions at the start of your employer's benefit plan year. For example, if your employer's benefit year starts on January 1, you could get your child's braces in January and be reimbursed for the entire out-of-pocket amount right away, up to the amount of your annual deduction, before all of the year's payroll deductions have been made.



When do I choose my contribution amount, and when can I change it? You choose your FSA contribution amount during open enrollment (it's usually in the fall); this is the time of year you elect/change your benefits such as medical, dental, etc. Open enrollment season varies from company to company. Once your contribution election becomes effective, you won't be able to change it until the next open enrollment period, UNLESS there is a change in your eligibility status (such as marital status, a newborn, an adoption, etc.). You must check with your employer for specific eligibility status rules.


Is a Healthcare FSA the same as a Health Reimbursement Arrangement (HRA) or a Health Savings Account (HSA)? No. A Healthcare FSA is NOT the same as a Health Reimbursement Arrangement (HRA) or a Health Savings Account (HSA). However, all three accounts allow you to purchase OTC products.

The HRA is a medical expense reimbursement plan, in which only your employer may make contributions on your behalf - you may not make pretax contributions to an HRA. An HRA may be offered together with a high-deductible health plan or on a stand alone basis.

An HSA is different from FSAs and HRAs. You can only make or receive contributions to your HSA if you are enrolled in a special high deductible health plan (HDHP).


Do I earn interest on the money I contribute to my FSA? FSAs are not required to accrue interest.


What happens to my Healthcare FSA contributions if I leave or am terminated from my job? If you leave or are terminated from your job, the amounts credited to your FSA will be forfeited. However, if you have used your entire FSA benefit prior to your leave/termination, you may not be required to pay your employer the balance of the remaining monthly contributions.


Adding expertise from too-old-now:

The FSA is technically an insurance plan between you and your employer - there has to be risk for both parties. The employer's risk is that they have to pay the expenses before the money goes in the plan. If you leave, you can not be required to reimburse them. They might ask, but don't pay it back.

I left a prior employer in late January one year. It was a great year as before I left I incurred major dental expenses (two crowns) and got them both reimbursed by the FSA. I also got a couple pairs of glasses and prescription sunglasses - by sticking it to the old employer.

Note that the maxing out each employer's limit only applies to the medical/ Health care Flex Spending Account.

The Dependent Care FSA limits are IRS limits, and it's important to note that in a situation where both spouses work, the annual $5000 limit applies to both of them. It is all too common for 2 wage-earning spouses to both try to elect the max DC FSA from their respective employers' plans. Then they get nailed when they file their taxes.

For the Health Care FSA, many employers apply both a per-pay period limit as well an annual limit. In the second employer's plan, you can only submit claims incurred after you have become a plan participant (enrolled, met eligibility requirements, etc.) I don't really like the phrase "double-dipping" since that might imply you could submit copies of the same claim to both the prior and current employer's plan.

The FSA plans should not be the sole reason someone changes jobs.

Nevertheless, if someone finds themselves in the situation where they are changing jobs mid-year, if they pay attention they can come out ahead.

Can I continue my FSA through COBRA? You may continue your FSA on COBRA provided there is a positive balance in your FSA when you seek to continue coverage; that means you have contributed more to the FSA year-to-date than you have received in reimbursements.


Why shouldn’t I just make these deductions on my income tax? Claiming a tax return deduction is only beneficial for people with substantial uninsured medical expenses. According to the IRS, only medical/dental expenses that exceed 7.5 percent of your "adjusted gross income" and not covered by insurance can be deducted from your income taxes. Most people do not have uninsured medical expenses high enough to qualify for this deduction. For example, if your adjusted gross income is $40,000, you could only deduct those uninsured medical/dental expenses in excess of $3,000 from your income taxes.


Can you give me an example of the savings using an FSA?


Here is a "real" example:


Your specific savings will depend on your salary, how much you contribute into the FSA, your tax bracket, how you file your taxes (single, married, etc), your health, etc. Generally, participants save 15% - 30% on eligible items purchased using their FSA dollars.




FSA ELIGIBLE EXPENSES:

Healthcare FSA funds can be used for co-payments, coinsurance, and deductibles…and also many medical, dental, eye care, over-the-counter medications, and over-the-counter products! Your employer can provide you with a list of the specific items covered by your employers plan; the following are generally included:

Here are some typical examples of FSA-eligible expenses (things that often aren’t paid for by health insurance plans):
• Medical and dental deductibles and co-payments
• Eye exams, contact lenses, and glasses
• Prescription drug co-payments and co-insurance
• Over-the-counter (OTC) products
• Orthodontia or other dental care
• Physical therapy
• Chiropractic care
• Hearing aids

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ELIGIBLE Medical Care Costs

• Acupuncture
• Alcoholism Treatment
• Ambulance
• Artificial Limb
• Autoette/Wheelchair
• Bandages
• Breast Reconstruction Surgery1
• Birth Control Pills
• Braille Books and Magazines
• Chiropractor
• Christian Science Practitioner2
• Crutches
• Diagnostic Services
• Disabled Dependent Medical Care
• Drug Addiction Treatment
• Drugs and Medicines (Prescription and OTC Eligible for HCFSA)
• Fertility Treatment (to Overcome Infertility)
• Guide Dog or Other Animal
• Hearing Aids
• Home Care
• Hospital Services
• Laboratory Fees
• Lead Based Paint Removal
• Lodging Essential to Medical Care3
• Maternity Care & Related Services
• Meals for Inpatient3
• Medical Information Plan
• Medical Services (e.g. Physician, Surgeon, Specialists)
• Mentally Retarded, Special Home for
• Nursing Home
• Nursing Services
• Operations
• Organ Donor’s Medical Expenses and Transportation
• Osteopath
• Oxygen
• Prosthesis
• Psychiatric Care
• Psychoanalysis
• Psychologist
• Special Education4
• Sterilization
• Stop-Smoking Programs
• Surgery
• Telephone for Hearing-Impaired
• Television for Hearing-Impaired
• Therapy
• Transplants
• Transportation Essential to Medical Care
• Vasectomy
• Weight-loss Program That Is Part of Specific Disease Treatment Program
• Wheelchair
• Wig to Replace Hair Lost to Disease
• X-ray

ELIGIBLE Prescriptions
Includes out-of-pocket expenses for prescription drug co-payments and co-insurance


ELIGIBLE Dental Care
Includes out-of-pocket expenses for preventative and basic procedures, tooth extractions, root canal, crowns, dentures, and orthodontics


ELIGIBLE Eye Care
Includes eye exams, eyeglasses, prescription sunglasses, contacts, LASIK surgery
Eyeglasses
Contact Lenses
Prescription Sunglasses
Eye Examinations
Eye Surgery (e.g. LASIK)
Optometrist


ELIGIBLE OTC Medications

• Acne Treatments (Medically Necessary)
• Allergy Prevention and Treatment (i.e., Tylenol® Allergy Sinus)
• Analgesics/Antipyretics
• Antacids and Acid Reducers (i.e., Imodium® GasAid, Mylanta® Heartburn, Mylanta® Gas, Children’s Mylanta® Chewable Tablets, Pepcid® AC)
• Anti-arthritics (i.e., Tylenol® Arthritis)
• Antibiotics
• Anticandial (Yeast) (i.e., Monistat®)
• Antidiarrheal and Laxatives
• Antifungal
• Antihistamines
• Anti-itch Lotions and Creams (i.e., Aveeno® Anti-Itch, Cortaid®)
• Antiseptics
• Asthma Medicines
• Bandages
• Blood Pressure Monitor
• Bug Bite Medication
• Carpal Tunnel Support
• Cold and Flu Remedies (i.e., Tylenol® Cold and Flu, Children’s Motrin IB® Cold)
• Cold Sore/Fever Blister
• Contact Lens Solution
• Contraceptive Products (e.g., Condoms)
• Cough Suppressants or Expectorants (i.e., Tylenol® Cough & Sore Throat)
• Decongestants (i.e., Motrin IB® Cold and Sinus)
• Dehydration
• Denture Adhesives
• Diabetic Supplies
• Diaper Rash (i.e., Balmex®, Johnson’s® Diaper Rash Cream, Aveeno®)
• Diuretics and Water Pills
• Ear Care
• Eye Care
• Eye Drops
• First Aid Supplies (i.e., BAND-AID® Brand Adhesive Bandages)
• Head Lice Treatment
• Hearing Aid Batteries
• Hemorrhoidal Preparations
• Lactose Intolerance (i.e., Lactaid® Dietary Supplements)
• Medicated Shampoo/Soaps (Medically Necessary)
• Migraine Relief (i.e., Motrin IB®)
• Motion Sickness
• Muscle/Joint Pain (i.e., Tylenol® Arthritis, Tylenol® 8 Hour)
• Nausea/Vomiting Remedies
• NSAIDS
• Ophthalmic Preparations (i.e., Acuvue®, Surevue®)
• Pain Relievers/Fever Reducers (i.e., Motrin IB®, Tylenol® Extra Strength)
• Pediculicide
• Personal Test Kits
• Pinworm Treatment
• Poison Treatment
• Pregnancy Tests
• Prenatal Vitamins (Medically Necessary)
• Reading Glasses
• Respiratory Stimulant Ammonia
• Sinus Products (i.e., Tylenol® Sinus)
• Sleeping Aids (to Treat Insomnia)
• Smoking Cessation
• Teething/Toothaches/Mouth Pain (i.e., Children’s Tylenol®, Tylenol® Extra Strength)
• Throat Pain Medications
• Topical Steroids
• Wart Removal
• Weight Loss Products (Medically Necessary)
• Wound Care (e.g., Gauze) (i.e., BAND-AID® Brand Adhesive Bandages)

NOTES:

1. You cannot include in medical expenses the amount you pay for unnecessary cosmetic surgery. This includes any procedure that is directed at improving the patient's appearance and does not meaningfully promote the proper function of the body or prevent or treat illness or disease. You cannot include in medical expenses the amount you pay for procedures such as face lifts, hair transplants, hair removal (electrolysis), teeth whitening and liposuction.

2. You cannot include in medical expenses the cost of nutritional supplements, vitamins, herbal supplements, “natural medicines,” etc. unless they are recommended by a medical practitioner as treatment for a specific medical condition diagnosed by a physician.

3. You cannot include in medical expenses the cost of an item used by personal living, or family purposes unless it is used primarily to prevent or alleviate a physical or mental defect or illness. For example, the cost of a toothbrush and toothpaste are not eligible expenses.

ELIGIBLE OTC products (requires a doctors note)

• Dental Fluoride Products5
• Feminine Hygiene Products (Post surgery or childbirth)
• Incontinence Products6
• Dietary/Fiber Supplements7
• Joint Supplements8
• Orthopedic Shoes and Inserts
• OTC Hormone Therapy
• Snoring Cessation Aids9
• Sunscreen

INELIGIBLE HEALTHCARE EXPENSES
Baby Sitting, Childcare, and Nursing Services for a Normal, Health Baby
Controlled Substances - without prescription
Cosmetic Surgery1
Dancing Lessons
Diaper Service
Electrolysis or Hair Removal
Funeral Expenses
Hair Transplant1
Health Club Dues
Health Coverage Tax Credit
Household Help
Illegal Operations and Treatments
Insurance Premiums (e.g., HMO premiums, Employer-sponsored health insurance plan premiums)
Maternity Clothes
Medical Savings Account (MSA)/ Health Saving Account (HSA) Contributions
Medicare B and D Premiums
Nutritional Supplements2
Personal Use Items3
Swimming Lessons
Teeth Whitening
Veterinary Fees
Weight-Loss Program not part of specific disease treatment



INELIGIBLE OVER-THE-COUNTER PRODUCTS
Aromatherapy
Baby Products (e.g., bottles, wipes, baby oil)
Breast Enhancements
Cosmetic Products (e.g., Makeup, perfumes)
Dental Products (e.g., Toothbrush, toothpaste, Dental Floss)
Dietary/Nutritional Supplements (e.g., Ensure, Glucerna, Slimfast)
Feminine Care (e.g., Tampons)
Herbal Supplements
Sun Tanning Products
Toiletries (e.g., Deodorant, Shampoo, Chap Stick)
Vitamins (for general health/routine use)

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Can I "double dip" a coupon, rebate, or refund on my FSA-reimbursed expenses? No. FSA can only be used to reimburse your actual out-of-pocket expenses. You cannot legally receive FSA reimbursements for expenses that were otherwise reimbursed.


Can I receive FSA reimbursements for items I donate to charity or give to other people? No. FSA is only reimburseable for your own (or family if included in your coverage) medical expenses. Just like other health insurance coverage, it is not "shareable" with others. Charitible donations may qualify for other tax deductions not discussed here.


What documentation do I need to submit for reimbursement of eligible OTC drugs?
Along with your completed and signed claim form, you typically need to submit an itemized receipt from the provider indicating the following:

• name of the provider or name of retailer where items were purchased
• date of the purchase
• word description of the item being purchased (a handwritten description is not acceptable)
• your out-of-pocket cost for the service

If your receipts do not have this information pre-printed, you will need to submit the product label, along with the receipt with the price. Your signature on the claim form certifies that you, your spouse, or your dependent will use the item purchased.