Flexible spending accounts, or FSAs, are a great way to save money. And if you are like me, you love to save money!
You can use flex spending accounts to purchase health care needs using pre-tax money. These purchases cover copays at the doctor, dentist visits, eyeglasses, over the counter and prescription drugs, and more.
What’s the catch? Each year you need to elect how much money you want deposited into your flex spending account. Any money you don’t use at the end of the year is gone. It’s referred to as the “use it or lose it rule.” But don’t let that scare you; typically, you’ll come out ahead even if you leave a few dollars in your account at the end of the year.
New Flexible Spending Rules
If you’ve been using your flex spending account each year, you’re probably familiar with the process. You’ll soon see an election form from your employer to choose the amount of money you want deposited into your 2011 flex spending account.
However, beginning next year, the rules for FSAs will be changing. Here’s what you need to know before you select your FSA amount for the upcoming year:
Over-the-Counter Medicines No Longer Qualify
2011 FSA changes include removing over-the-counter medicines from the list of eligible expenses.
If you typically stock up on pain relievers and other over the counter medicines at the end of the year to use up the rest of your FSA money, you might want to lower your contribution next year. (You can still purchase over the counter medicine using your account during the rest of this year.)
Changes to Maximum Limits
The $5,000 FSA maximum will be lowered to $2,500 beginning in 2013. What this means is that if you have expenses that will be more than $2,500 (like the laser eye surgery I had years ago), you’ll want to schedule them for 2011 or 2012 to make sure you get the full pre-tax benefit.
Calculate the Correct Amount
The best way to maximize the benefit of a flexible spending account, is to accurately match how much you’ll spend. To figure out how much you should put away in your FSA:
1. Look at last year. Go through your records and determine how much money you spent in your FSA last year.
2. Adjust for OTC. Subtract any over the counter medicines that will no longer be covered.
3. Adjust for changes. Will you begin any new prescriptions or stop any old ones? Determine what changes you’ll need to make. Don’t forget to look at your health plan to see if copays or deductibles will be changing, which will likely mean you’ll have more out of pocket costs you want to include in your FSA.
If you haven’t taken advantage of an FSA account in the past, it’s a great time to educate yourself on it, since it saves you money!
|Madison DuPaix is a mom to three young children with a background in finance and insurance. She loves retirement planning and taxes, and recently started her own tax business. Madison is the author of My Dollar Plan and is the guide to Kids and Money at about.com.|