Open enrollment season is just around the corner. With that in mind, I wanted to remind you of some changes that will soon be affecting Flexible Spending Accounts.
For those that are unaware, an FSA allows you to use pre-tax dollars to pay for medical expenses. Starting in 2003, over-the-counter (OTC) medications were added to the list of allowable expenses, thereby giving consumers a lot of flexibility in how they could spend their FSA money.
As I’ve outlined in the past, FSAs operate under some fairly Draconian “use-it-or-lose-it” rules. More specifically, if you don’t spend out your balance, you lose whatever money is left over at the end of the year. Given this stipulation, the OTC allowance was very valuable addition.
No more OTC purchases
Now for the bad news… Starting in 2011, OTC medicines will no longer be eligible for reimbursement unless you are expressly directed by your doctor to use them. In other words… It’s going to be a heck of a lot harder to spend down your FSA balance is you set too much aside.
Yes, you’ll still be able to use your FSA to pay for deductibles, co-pays, orthodontia, and eyeglasses, but you’ll no longer be able to claim OTC allergy medications, pain relievers, vitamins, antacids, and so on.
In other words, be very careful when deciding how much to set aside in 2011.
Caution: falling limits
Looking a bit further ahead, another big change will be a federally-mandated $2500 cap on FSA contributions starting in 2013. This new limit is part of the healthcare reform legislation that was passed this past spring.
As things currently stand, FSA limits are determined by employers, and it’s not uncommon to be able to set aside $5k. Depending on your income tax bracket and level of healthcare spending, that can be a huge benefit.