Open Enrollment Understanding Plans

Flexible Spending Accounts (FSA): Calculating Your Election

November 26, 2011
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Explanation of FSAs

Flexible Spending Accounts (FSA) are a way for employees to save pre-tax dollars to use for certain expenses.  Since maximum election limits are in the thousands per year, you have the potential to save a significant amount in federal taxes.  Your state might treat FSA contributions differently for tax purposes than does the federal government.

You elect an annual amount for the plan year, which is almost always a full calendar year. Your election will be deducted from your paychecks pre-tax.  To get back the funds, you must follow the procedures set by your employer, and most organizations contract with a third party administrator to process the claims.  Complete whatever claim form is provided and submit the appropriate documentation. Nowadays, the entire process is often online, and you will need to scan and upload your receipts.

The accounts come in two varieties, each with its own rules, but both types are “Use It or Lose It,” meaning you have to use up your entire election during the plan year or lose the balance.  And remember that the critical date is the DATE OF SERVICE, not the date of payment.

If you have a tooth filled on December 28, 2011, but you don’t write a check to the dentist until January 5, 2012, the expense counts for 2011, not 2012.  The only exception is if your employer has a grace period for the plan, adding 2.5 months to the time you have to use the funds.  For a plan year that starts January 1, 2012, you would have until March 15, 2013, to incur expenses.

Make sure you understand whether or not your plan has a grace period before deciding how much to elect.

Types of FSAs

Dependent Care

These accounts are used to pay for the non-medical care of your qualified dependents.  The most common use is for day care and after school care of your children under the age of 13.  You can also use the funds for the care of your disabled spouse, aging parents, or other disabled person under certain circumstances.   Other key features are

  • The maximum annual election is $5,000 ($2,500 if married and filing separately) and hasn’t changed in decades.
  • The care provider cannot be someone you claim on your taxes as a dependent (so paying your 17-year-old to babysit his younger siblings doesn’t count).
  • You (and your spouse if filing jointly) must both be working or looking for work for the expenses to be eligible.  Exceptions apply if your spouse was disabled or was a full-time student.
  • You will be reimbursed for your expenses only up to the amount that has been deducted to-date from your paychecks.  Any remaining claim amounts will be held until your next paycheck.  For example, if you submit $500 but have had only $350 deducted to-date, you will be reimbursed $350.  The remaining $150 will be reimbursed once your deductions reach that amount.

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There have been no changes to Dependent Care Spending Accounts in years, other than the addition of the grace period, and none are currently on the horizon.

Medical Care

Medical Care Spending Accounts, on the other hand, have changed frequently over the past ten years.  Most current participants are aware of the changes related to over-the-counter medications, but the Affordable Care Act (aka Healthcare Reform) has introduced additional modifications.

These accounts are used to pay for any out-of-pocket qualified medical expenses not covered by insurance.  The expenses can be for you or for your eligible dependents.

  • Currently the federal government does not set a maximum on Medical FSAs.  You employer, however, can set one, and these amounts commonly range from $5,000 to $8,000 per year.
  • As mentioned above, only expenses not covered by insurance are eligible.  Co-pays, deductibles, and co-insurance are common items, as are prescription medications, contact lenses, and glasses.
  • Documentation is key and can be complicated. A credit card slip or cancelled check is never enough standing alone: you must provide a more detailed receipt or statement.  Check with your employer if you have any questions about the paperwork you need.
  • Over-the-counter drugs are limited.  Many types now require prescription.
  • Even if you think something will not be covered by insurance – perhaps you’ve reached your annual limit for a service – submit it to your insurance carrier.  You might need the denial for your FSA claim.
  • You can be reimbursed up to your annual election at any point in the plan year if you have enough eligible expenses and regardless of how much has been deducted so far from your paychecks.
  • If you’re trying to figure out if an expense is eligible, check out a site called FSAFEDS, which is the FSA administration site for federal employees.  The Eligible Expenses Juke Box is very helpful and includes just about every category of medical services and products you can think of.

If you are planning a large medical expense and are basing your FSA election on this expense, check first with your employer or third party administrator before assuming it will be allowed.

Changes and Your 2012 Election

The Affordable Care Act includes some provisions that affect Medical Care FSAs – directly or indirectly – and that might affect on how much you elect for 2012.

  • Preventive care should be provided at no cost to the patient if your plan is subject to this provision (most are). The federal government maintains a list of covered services online – including the latest rules concerning preventive coverage specific to women.
  • Starting 2013, the maximum annual contribution will be limited to $2,500.  Take this into account when planning your medical expenses for 2012.

Next up:
How to Choose the Right Health Insurance Plan, part 1
How to Choose the Right Health Insurance Plan, part 2