What are flexible spending accounts (FSAs)?

Flexible spending accounts (FSAs) are voluntary, account-based plans used by millions of Americans across the country to manage their health care needs. FSAs enable working Americans and their families to pay for eligible out-of-pocket health care expenses, such as co-pays for prescription drugs, vision and dental expenses, office visits and medical supplies, with pre-tax dollars.

Who is covered by my FSA?

The money in your FSA can be used to pay for out-of-pocket health costs for you, your spouse, and any eligible dependents – including elderly parents or adult children up to age 26, regardless of whether you have added them to your health insurance.

What happens to my funds at the end of the year if I don’t use them?

As directed by the IRS, any money not used by the end of your coverage period would be forfeited.  However, you should not have to forfeit any money if you plan carefully and only set aside money in an FSA for your predictable health care expenses.  Additionally, some employers provide a grace period that allows participants to spend their FSA after the end of the plan year (see more information below).

Can I change my election if I use up all the funds in my account before the end of the year?

Generally, no. You can only change the amount you are contributing if you have a qualifying life event, such as marriage, divorce or the birth of a child.  Some employers may also allow you to change your contribution amount if you have recently added an adult child up to age 26 back onto your health insurance during the plan year.

How long do I have to use the funds available in my account?

The normal time frame for using your FSA is 12 months – usually January 1st to December 31st for calendar year plans.  However, many plans provide participants with a 2 ½ month extension or grace period to make sure that they have enough time to use all the funds they elected for the year.  Check with your employer to see if your FSA plan has a grace period.

Why do some expenses require a doctor’s statement or letter of medical necessity to be reimbursed?

Many treatments, like massage therapy or weight-loss clinics can be used for either medical or non-medical/cosmetic reasons.  Because IRS regulations state that FSAs may only be used for medical costs, your doctor needs to verify that these treatments will treat a disease or illness.

Stay ahead of the game by asking for written authorization at the beginning of the year for any FSA-eligible expenses that require a doctor’s permission for reimbursement.  And, as of January 1, 2011, a doctor’s prescription is required for over-the-counter (OTC) medications, such as Claritin and Tylenol.

If I have a flexible spending debit card, should I still hold on to receipts?

You should keep all of your receipts so that you will be able to provide proof that your purchase was an approved item.  In addition, be sure to check your account balance frequently so you know how many of your FSA dollars are available for you to use on qualified expenses. Most of the time, debit card transactions are able to be automatically adjudicated, but in about 20% of the transactions, there is not enough information to satisfy IRS substantiation requirements. When this occurs, you’ll need to submit documentation for the transaction.

What if I leave the company or retire during the year and still have money in my account?

You will be reimbursed for any eligible expense incurred before the date you retire or leave the company. Under IRS regulations, any remaining funds in the account must be forfeited. Any expenses you incur after the end of your employment are not eligible for reimbursement. In some cases, you may be able to continue your FSA after termination under COBRA rules. Your employer will offer you the right to continue the Health FSA if this applies to your circumstances.

What important changes to FSAs have happened since the passage of health reform?

As of January 1, 2011, over-the-counter medications like aspirin and Claritin will now require a doctor’s prescription in order to be reimbursed by your FSA. However, this provision does not prohibit you from obtaining any of these necessary items — it just requires an additional step.

Also, beginning in 2013, there will be an annual limit of $2,500, adjusted for inflation, on your contributions to a health flexible spending account.  Currently, this limit is set by the individual employer.

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