Taking a Second Look at Flexible Spending Accounts

22722908 - blue piggy bank with stethoscope for check your financeAre you looking for a way to save money on those need-to-have items that you buy throughout the year?  You know, not fun items or cool clothing, but rather those medical expenses that have a way of draining your wallet?  Have you ever considered using a medical Flexible Spending Account (FSA)?  Flexible Spending Accounts have been around for over 50 years, initially created in the 1970’s by the Internal Revenue Service as a solution to the addition of deductibles and elimination of dental and vision insurance by many employer-sponsored health insurance plans. The expenses that insurance didn’t cover – but employees still experienced – were given a tax-free pass by the IRS up to an annual limit.

Over the years the accounts have gone through many changes:  adding the convenience of debit-card access, on-line claims submission services, increases in the annual limits, and elimination of many over-the counter expenses as eligible.  So how do you know what you can and cannot use the account for, and is it really worth the hassle of claims submission?

To help eliminate the worries about what the accounts can be used for, coding has been put in place for vendors who offer the convenience of the debit card option.  In order for the card to work, the business must be primarily listed as a pharmacy, hospital, clinic, etc., so if you try to use the card at a restaurant, it won’t work.  Additionally, in 2011 the IRS eliminated the eligibility of many over-the-counter products obtained without a prescription (e.g., ibuprofen, acetaminophen, vitamins) and to ensure compliance locations that offered these products (e.g., Walgreens, CVS) were required to code their inventory so that the purchases could be flagged at the registers as non-eligible for FSA dollars.  For this reason, if you try to purchase a non-eligible item at some retailers with your FSA debit card, the item will be excluded from the amount charged to the card.  Some retailers responded by adding an indicator to their receipts to notate FSA-eligible items.  This isn’t a foolproof approach, however, as many eligible locations (dentists are a prime example) offer both FSA-eligible AND non-FSA-eligible expenses (think cavity repair versus teeth whitening.)

Another trend emerging to help consumers determine eligible expenses is the rise of websites that illustrate FSA-eligible versus non-eligible items like www.fsastore.com.  When a consumer uses a website like this, they’ll see lists of FSA-eligible items available for on-line purchase, with special notations next to any items that require a prescription for eligibility.  Websites like this are helpful for consumers who may have funds remaining at the end of the calendar year and want to avoid losing money to the “use it or lose it” clause associated with these accounts.  Most people would not run out and choose elective medical procedure to use up their funds, but might benefit from refreshing their first aid kits at home or buying a vaporizer for a bedroom.

So how about the convenience factor?  Are these debit cards all they’re cracked up to be?  With the addition of the automated coding at many retailers and employers submitting co-pay lists to help the administrators “auto-substantiate” charges (recognize them as eligible purchases without additional proof), the cards are becoming easier and easier to use.  Plus, most FSA administrators have the ability to accept uploaded receipts or even capture photos taken with smart phones as sufficient documentation for purchases.  Lastly, the IRS has become more flexible with the “use it or lose it” clause over the years, giving employers two options for providing more flexibility: 1) offer a spending grace period (allowing employees to spend last year’s funds for 2.5 months into the following year), OR 2) roll-over up to $500 of remaining funds into the next plan year.

With all of these positive changes and considering that this is money that you would be likely to spend anyway, perhaps Flexible Spending Accounts deserve another look?

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