Personal Finance

It's use it or lose it time for many with flexible spending accounts

Key Points
  • Unless your employer offers a grace period or rollover option, the pretax money you have in a flexible spending account must be used by Dec. 31.
  • If you get a reprieve, make sure you note when it expires and make a plan to use the funds.
  • For 2018, the maximum contribution for health FSAs is $2,650, up $50 from 2017.

Putting pretax money in a health-care flexible spending account can be a great idea — until you have to forfeit what you don't spend.

As Dec. 31 approaches, workers with these accounts — where you can sock away pre-tax earnings to use for qualified medical expenses — should make sure they know exactly what happens to any remaining funds when the calendar flips to 2018.

The general rule is such funds are "use it or lose it." However, companies can offer either a grace period of up to 2½ months for employees to use the money or allow up to $500 be carried over to the next year. They cannot offer both.

(Even if you have a hard deadline of Dec. 31 for spending, you often have until March 15 of the following year to submit claims. So you don't have to press the doctor to bill you by New Year's Eve.)

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If you face a Dec. 31 deadline to spend the money and have no options for scheduling any doctor or dentist appointments quickly, look to see what qualifies as accepted expenses.

Products like contact lens solution, condoms, first aid kits, and high-SPF sunscreen are among the eligible items. Over-the-counter medications qualify, too, although they typically require a doctor's prescription. You may also be able to get reimbursed for mileage and tolls incurred for travel to and from doctor's appointments during the year.

If you get a grace period, make note of when it expires and make a plan to spend any leftover 2017 funds before then.

"Make sure you schedule any sort of medical procedure or other doctor appointments during that grace period, like a dental procedure or a chiropractor visit," said certified financial planner Ashley Foster, a partner at Gross and Foster Financial Services in Houston.

For a rolled-over amount, check with your company to see if there's a limit to how long you have in 2018 to spend it.

Generally, it's best to make sure your FSA contributions at least align with the deductible on your insurance plan.
Ashley Foster
Gross and Foster Financial Services

Regardless of what's happening to your extra FSA funds this year, it's a sign that you could end up in the same situation a year from now. Unfortunately, companies likely have closed the window for changing how much you put into your FSA for 2018.

For most plans, that means unless you have a major life change — i.e., divorce, a new baby — you'll be unable to adjust your FSA withholding until the next open enrollment period. The contribution limit to health FSAs for 2018 is $2,650, a $50 increase from 2017.

While it can be tricky to predict your medical expenses in any given year due to the possibility of unexpected health issues, Foster said he recommends that most workers put at least enough in the FSA to cover their health insurance deductible.

Plan for health care in retirement
Plan for health care in retirement

"If someone is going to use medical services and has a $1,000 deductible, that will be $1,000 out of their pocket," Foster said. "Generally, it's best to make sure your FSA contributions at least align with the deductible on your insurance plan."

FSA dollars can be used to cover a broad range of costs. In addition to your deductible and over-the-counter health items, you generally can use the money for copays, coinsurance and prescription drugs and supplies.

As you go through the year, be aware of those qualifying expenses and make sure you use your FSA funds to pay for them. And when your company holds its next open enrollment, evaluate whether you need to adjust your pretax withholding for 2019.

"With proper planning, an FSA can be a really good tool in helping you manage your health care expenses in the following year, especially if you know you'll have ongoing medical expenses," Foster said.

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