Year-end Planning

Stretch your tax savings with a flexible spending account

Jennifer Woods, special to

No one likes paying taxes, and more than half of Americans believe the federal income taxes they're paying are too high.

Surprisingly, however, many people are not taking advantage of simple tax-savings vehicles that could easily lower their tax bill — in particular, flexible spending accounts.

An FSA is an account, offered by many employers, that allows you to contribute money on a pretax basis to be used for certain expenses related to health or dependent care. Because the money that goes into your FSA is deducted from your income on a pretax basis, it lowers the amount of income on which you are taxed.

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"The great thing about an FSA is that it's a tax-favored plan … so it's saving you money," said Kemberley Washington, a CPA and member of the Financial Literacy Commission of the American Institute of Certified Public Accountants. "If you put in $500 and it's not taxed … you're getting more buying power for your money."

Employers determine the contribution limits, though the maximum allowed by the Internal Revenue Service for 2015 is $2,550 for a health-care FSA and $5,000 for a dependent-care FSA (for a married couple filing jointly).

Despite the obvious tax benefit of FSAs, most people are not taking advantage of them, according to Lisa Greene-Lewis, a CPA and tax expert with Intuit's TurboTax division.

"They may not realize they can save on taxes while they're saving on their medical bills," she said. Greene-Lewis added, however, that an FSA "offers a great tax advantage, as you don't have employment or federal taxes taken out."

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"Plus, there are no reporting requirements on your taxes, since it's tax-deferred through your employer."

FSAs are widely available.

To that point, 62 percent of companies with 50 to 499 employees and 85 percent with 500 to 4,999 employees offer their employees access to health-care FSAs, according to the National Survey of Employer-Sponsored Health Plans from human resources and financial services consulting firm Mercer. For dependent-care FSAs, 58 percent of employers at the smaller-size companies offer them, while 83 percent of larger firms also make them available.

However, the percentage of people participating in the plans remains low. Health-care FSA participation is just 32 percent and 24 percent for smaller and larger companies, respectively, while dependent-care FSAs participation is just 10 percent and 7 percent, respectively.

Experts say one reason people are often hesitant to participate in their company's FSA is the risk of leaving unused money in the account. The percentage of dollars forfeited at the end of each year, however, is actually fairly low, according to reports.

If you've contributed to a 2015 flex spending account, you will have until March 15, 2016, to incur any expenses and still have it apply to the 2015 account.
Craig Rosenberg
health and welfare national leader at Aon Hewitt

According to the Mercer study, in 2013 the average percentage of dollars forfeited for the smaller company FSA plans was 3 percent to 4 percent, and just 1 percent to 2 percent with larger company plans.

Craig Rosenberg, health and welfare national leader at benefits consulting firm Aon Hewitt, said that among companies with FSA plans, "there is typically a lot of outreach to employees who have remaining balances … so that people don't lose the money."

Additionally, while it used to be true that you would lose the funds if you didn't use all of the money in your FSA by Dec. 31, newer policy changes have eased that restriction.

According to Rosenberg, companies now have the option of offering a two-and-a-half-month extension to incur or submit claims. "So if you've contributed to a 2015 flex spending account, you will have until March 15, 2016, to incur any expenses and still have it apply to the 2015 account."

Additionally, he said, another new rule is "the carryover rule, which lets individuals carry over up to $500 of their unused FSA balance into the next year."

"That gives some more flexibility, since you can use that money through 2016," he explained.

Companies can chose to take advantage of one of those options, though Rosenberg said the trend seems to be shifting in favor of the carryover. Currently, among Aon's clients, 32 percent offer the two-and-a-half-month extension, and 39 percent offer a carryover.

Experts advise people to make themselves fully aware of the rules and restrictions surrounding their company's FSA, as there can be a lot of variation from one plan to the next. Additionally, it's important to become familiar with the type of expenses that are covered under the FSA plan because, although many of these eligible expenses — such as co-pays and prescription drugs — are obvious, some are less so.

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For instance, in terms of health-care expenses, items such as contact lens solution and blood pressure monitors or even an air conditioner or air purifier, if deemed medically necessary, may be eligible. Meanwhile, in some plans a dependent-care FSA could pay for summer camp, it may cover money owed to relatives who help care for someone in your family or even for fees you incur if your child has to stay late at kindergarten because of work-related reasons.

One more note: If you're enrolled in a high-deductible insurance plan and have a health savings account (HSA), the rules for contributing to an FSA are a bit different.

HSAs are similar to FSAs in that you can contribute money on a pretax basis (they have even higher limits on FSAs). However, HSAs function more like a 401(k) plan: Some employers will match your contribution, and the money can stay in the account and grow over time.

If you have both an HSA and an FSA being used for medical expenses, that can be considered duplicate coverage. To avoid that, you would need to limit your FSA to covering expenses related to just dental and vision.

While there can be some tricky caveats to FSAs, the bottom line is that using them can result in yearly tax savings. But before enrolling, it's a good idea to first do an assessment of your health and dependent needs and find out the particulars of your plan, so you don't end up leaving any money on the table.

—By Jennifer Woods, special to