Use flexible spending account funds - or lose them
The holidays aren't the only cause of year-end spending: Many Angie's List members go on a health care spending spree to deplete "use it or lose it" money in their health Flexible Spending Accounts.
Health care providers such as highly rated Caraway Orthodontics in Louisville, Colo., outside of Denver brace for an FSA onslaught each year. "We end up squeezing people in [for appointments] because they totally forgot or put it off until the end, and now they are scrambling," says Carrie Petrocco, the company's financial manager.
But for Angie's List member David Ross of Hillsboro, Ore., it's more of a paper chase than spree. "I end up with a couple of hundred dollars left to spend, but it's easy in December to go back through my unclaimed medical expenses and send off receipts and get a check back," he says.
Seventy-eight percent of Angie's List members who took a recent online poll say their employer offers an FSA, and of those members, 73 percent say they put money in it. Nationwide, about a quarter of employees with access to an FSA actually use it, according to human resources consulting firm Mercer.
Members report they most often use FSA money for dental care and orthodontics, followed by eye care and Lasik surgery. An FSA allows people to set aside money for eligible expenses - typically health-related for themselves or their dependents. The money is taken out pretax, meaning it reduces the amount of income subject to federal taxes and most state and local taxes.
The IRS sets guidelines as to what is covered under an FSA and what isn't. Smoking cessation classes, for one, are eligible, but over-the-counter nicotine gum and similar items aren't. Breast reconstruction after a mastectomy is eligible, but not cosmetic breast enhancement or other cosmetic procedures such as teeth whitening. Chiropractic care, acupuncture, fertility treatments and psychiatric care are also reimbursable.
Ben Meyerhoff, practice manager for the Center for Integrative Medicine at highly rated University of Colorado Hospital in Aurora, sees an end-of-year influx of FSA patients seeking acupuncture and chiropractic care.
"Acupuncture is not just a spa treatment," he says. "It effectively reduces pain, stomach troubles and side effects of chemotherapy like nausea." Rarely do FSA administrators question the expense, he says. "We've had a handful of requests for more documentation, and we're more than happy to help."
The annual savings of having an FSA can be significant, according to accountants. A person paying 30 percent in taxes who sets aside $2,500 in an FSA would save $750. Your employer determines the maximum amount you can contribute each year, but the average contribution is $1,500. Beginning in 2013, federal law will cap the annual amount at $2,500, which is part of the Affordable Care Act of 2010, to increase taxable items and income.
Sometimes, health care providers go the extra mile to maximize the FSA benefit for patients. Kirsten Longnecker of Broomfield, Colo., says she's thankful she can share the cost of her daughter's braces with her ex-husband, who also has an FSA. Caraway Orthodontics splits the cost and bills each of them. "That allows each of us to use our FSA funds," Longnecker says.
Petrocco says braces typically cost between $4,500 and $5,500 over two years - more than most employers allow to be set aside in one year - so they'll time the billing to fall in separate calendar years. "We're pretty flexible with people because we know they're going to have the money," she says.
Before contributing to an FSA, experts suggest consulting with your employer's human resources department, or your accountant, and carefully consider how much money to invest. A recent survey from United Healthcare, an insurance provider, says people usually spend one hour or less making their benefit decisions each year.
"Be sure to take time to estimate your health expenses conservatively and review them before enrolling," says Linda Jeglinski, director of flex spending administration with BAS, a health management solutions provider. "Some companies have added grace periods, so if you haven't spent all the amounts in your FSA account by the end of the year you may have a few more months to exhaust the balance."
Although it's not required, about 75 percent of employers offer a grace period, typically extended through March 15, says Jody Dietel, chief compliance officer with WageWorks, the nation's largest benefits administrator. During the grace period, employees can incur health expenses and seek reimbursement from the previous year's funds. An expense incurred during the grace period also might be
Ross' employer offers the grace period, and he's never had to forfeit money. He sets aside $2,000 a year to cover health expenses. He also uses his FSA for eye care extras not covered by insurance such as designer frames, anti-scratch coating and high-density lenses. "It's free money, basically," Ross says.
However, Longnecker lost $200 her first year with an FSA. "It became an unintentional gift to my company," she says. "No one shows you how to fill out the reimbursement forms and they are a little confusing. I finally asked a co-worker to show me what to do."
Leftover money returns to the employer, who must follow IRS guidelines about how to spend it. The money can't be returned to an employee, but can be used to offset plan expenses, says Trent Dunlap, senior sales consultant with benefits consultant HR Butler in Dublin, Ohio.
But less than $100 on average is forfeited by plan participants, Dietel says. "This needs to be put in context, though," she adds. "They have saved from 25 to 40 percent [in taxes], so a loss of $83 on a $1,385 election and a 25 percent tax savings yields a net savings of $263.25, even after forfeitures."
A bill pending in Congress, HR 1004, seeks to remove the "use it or lose it" provision so employees can get back unspent money. As of press time, the bill had been stalled in committee since March. "There's always hope," says Josh Gillespie, communications director for Rep. Dan Burton, R-Ind., who is one of the co-sponsors.
However, Dunlap says "use it or lose it" poses more risk to the employer. The FSA funds are available Jan. 1, and if an employee spends that money then leaves or is fired, the employer picks up the burden. Dietel says an employer must specifically state in its plan that it will deduct the balance due from the last paycheck, but such a provision is "highly unusual."
Brian Jackson of Rochester, N.Y., says when he changed employers this year he lost access to his FSA, but he doesn't miss it. The $800 he typically set aside would go toward co-pays, dental cleanings, prescriptions and over-the-counter medicine like pain relievers.
In January 2011, the rules changed and FSA money now can be used for over-the-counter items only with a doctor's prescription. "With the new rules, it would be much harder to use up," he says.
Pat Martin of Chicago is using her FSA again after a bad experience prompted her to drop it a year ago. "I swore I'd never have another FSA," she says. Her company's FSA administrator questioned one of her purchases and her pharmacy had to track down the receipt. "It was a nightmare," she says.
Now her company has a new administrator and this year she set aside $500 for big-ticket items only, such as her copay for a planned colonoscopy. "I'm a lot more careful," she says. "I save all my receipts."
Health professionals say most FSA clients are like Martin because if they're not trying to spend money at the end of the year, they're trying to estimate their health care costs for the following year.
Dr. David Whiting of highly rated Whiting Clinic in St. Louis Park, Minn., says about one-third of his FSA patients get Lasik before the end of the year, and the remainder are deciding the amount to put into their FSA for Lasik the next year. Ideally, Whiting says, patients should make sure their surgeon has cleared them for Lasik before setting aside the money.
"Sometimes they're not a candidate because their corneas are too thin or some other factor and they are bummed out. They've set the money aside and they've got to find something else to spend it on," says Whiting, who's average price for Lasik is $1,245 per eye. The prequalifying exam is free.
Because FSA money must be spent, highly rated financial planner Christopher Currin of Pegasus Advisors in Dallas advises clients to limit FSA contributions to "relatively predictable, recurring expenses." It works even better if a client can set aside money for an expensive procedure and schedule it early in the year.
"It allows you to finance a large elective surgery rather than going to a bank or using a credit card," he says. "You can incur that expense early in the year and pay for it with FSA before you've actually made the contribution to FSA."
Having all the money available immediately is one of Longnecker's favorite features. "I'm waiting now on some pricey dental work for myself until early 2012, because I've maxed out my FSA this year and, frankly, paying my daughter's college tuition is more important."
She now contributes $3,000 to her FSA. "As a single mom of two teens, it's important I make our money work," she says. "If I didn't use the FSA, I'd be handing over more money to taxes on items I'd still be purchasing and services I'd still have to use.