Does the new health-reform law affect any of my flexible
spending account decisions during this year's open-enrollment
Contributing money to a health-care flexible spending account
continues to be a great way to stretch your dollars. The money you
contribute to these payroll-based savings accounts escapes both
federal and Social Security taxes (and in most cases, state and
local income taxes, too). You can use the tax-free funds to pay
out-of-pocket medical expenses throughout the year.
Every fall, you need to make some key decisions about your flex
plan, including how much to contribute to next year's account and
how to use the money remaining in this year's account before the
cutoff date (if you don't use it, you lose it). In most cases, you
have until March 15, 2011, to use your 2010 funds, but some
employers still adhere to the old December 31 deadline for using
the money or forfeiting the balance. Check with your employer to
verify your plan's deadline.
Health-care reform has made some key changes to flexible
spending accounts starting in 2011. The changes will affect how
much you can contribute to these tax-advantaged accounts, how you
can spend the money, and which of your family members can benefit.
Here are three new rules that may affect the amount of money you
decide to set aside in your account for next year -- and how you
use any money left over in the last few months of 2010.
1. No more non-prescription drugs.
Starting in 2011, you'll no longer be able to use FSA money for
non-prescription drugs (except insulin). And even if your employer
gives you until March 15, 2011, to use up the money in your account
from 2010, you still won't be able to spend it on over-the-counter
drugs without a prescription after December 31, says Sunit Patel,
senior vice-president of Fidelity Investments Benefits Consulting.
Keep this in mind as you plan your FSA spending for the last few
months of the year.
Also, ask your doctor if you can get a prescription for any
over-the-counter medications you use regularly, such as pain
relievers, allergy medications, anti-fungals, and cough and cold
medicines, says Jody Dietel, of WageWorks, which administers FSAs
for employers. Starting in 2011, you'll need to submit a
prescription along with a receipt (or a receipt listing the Rx
number) to your FSA provider in order to get reimbursed for the
medication from the account. And there are penalties for skirting
the rules. If you use your FSA money to buy non-qualifying medical
expenses, the amount will be included in your gross income and
subject to an additional tax of 20%.
2. New rules for adult children's expenses.
FSAs have always allowed liberal coverage for children -- you could
use the money for any dependent child's medical expenses, even if
that child was not covered by your health-insurance plan. So even
if your child had coverage through your spouse's plan or another
insurance provider, you could still use the money in your FSA for
their out-of-pocket costs (but not to pay for health-care
premiums). In the past, you could use the FSA money only if your
child was considered a dependent for tax purposes. But most
employers have expanded the definition of dependent to include any
child who is younger than 27 at the end of the year, even if he or
she isn't claimed as a dependent and doesn't live at home.
Before deciding how much to set aside for next year's medical
expenses, ask your employer which of your family members are
eligible to use FSA money in 2011. And find out whether this change
applies in 2010, too. A few plans have already implemented the new
rules, which means you may have more options for putting your money
to use by this year's deadline.
3. Lower FSA limits in the future.
FSA limits aren't changing in 2011 -- many employers will allow
contributions up to $3,000 or $4,000 in the account. But the
maximum limit will shrink to $2,500 in 2013. So if you're
considering a costly elective medical procedure that isn't covered
by insurance -- such laser eye surgery or a major dental procedure
-- you might want to schedule it in 2011 or 2012 so you can
stockpile more pretax money in your FSA account.
If your employer offers a grace period until March 15 of the
following year to use up the previous year's FSA money, there's a
sweet spot in the first few months of the year when you can double
up your available funds, using any money left over from the
previous year combined with the current year's FSA allocation. See
Saving Grace Period for Flex Account
For more information about the upcoming changes to FSAs, see
What Health Reform Means to FSAs and HSAs
. And for a preview of how your health-insurance options may be
changing in 2011 and for advice on open enrollment this fall, see
Health Insurance Changes for 2011