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(HealthNewsDigest.com) – Many employers offer a flexible spending account (FSA) as a benefit. An FSA allows employees to pay for some medical (and sometimes dependent care) expenses using pre-tax dollars. With many FSA balances expiring at the end of the year, now is the time to use up your 2010 fund.
Paying with pre-tax dollars means you don’t pay taxes at all on those qualified medical costs. An employee earning $30,000 who uses an FSA to reimburse $2,000 in medical expenses per year could increase take-home pay by more than $613, or about $50 per month. That is a nice chunk of change to use to repay debt or add to an emergency fund. Here are some simple steps to making the most of your FSA plan as 2010 draws to a close.
1. Find your balance. Check with your employer or your FSA manager to see how much money remains in your FSA account. Also ask when your plan year ends. Some FSAs expire at the end of the calendar year. Others expire at a different time during the year.
2. Use it or lose it. Employees who do not spend the money in their FSA account by the end of the FSA plan year lose that money. Some plans offer a grace period of several weeks or months, so that even if your plan ends Dec. 31, you might have a month or two to spend the money. Again, clarify your situation with your employer or plan to be sure.
3. Know what you can buy. If you need to use up remaining funds, you can learn more about FSA-qualifying expenses from the IRS website. Examples of qualifying expenses include medications, contact lenses, household first-aid products, doctor and dentist visits and more. Your employer’s plan might have specific restrictions, so take note.
4. Add up medical bills. You’ll want to check how much you spend on medical bills for two reasons. One, before you re-enroll in an FSA for next year, you should know how much you spend – and therefore how much you should put into your FSA. Two, if your medical and dental expenses for 2010 add up to more than 7.5 percent of your household adjusted gross income (AGI), they might be tax-deductible. At that point, all medical expenses for the year can reduce the tax bill. If you are close to the 7.5 percent cutoff, you might want to schedule other needed care ASAP so that you reach the deduction and minimize your out-of-pocket costs.
5. Know about changes. In the past, people could use FSA accounts to pay for over-the-counter medicines – that is, drugs that can be purchased without a prescription. In 2011, new laws will make these purchases ineligible to be purchased via your FSA. If this is a significant amount of your FSA spending, you will want to adjust your planning accordingly.
6. Re-enroll for next year. For many employees, re-enrollment in an FSA plan is NOT automatic. Check with your company to be sure. Usually, you will need to complete a new allocation form that specifies how much money you want taken from your paycheck and put into the FSA fund. If you miss the deadline, you will miss out on FSA tax benefits for an entire year. Be sure you don’t allocate more money than you will spend. Remember that if you don’t spend it all, you lose what you haven’t spent.
7. Plan ahead. Health care legislation includes one other change to FSA rules. Beginning in 2013, plans will be limited to a maximum contribution of $2,500 per person. If your plan has higher limits or no limits, and you intend to use it to cover a large expense like braces or laser vision correction, plan accordingly in 2011 or 2012.
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