It's not too soon to start thinking about how to deal with your flexible spending accounts (FSAs) in 2011. How you can use the accounts — which allow employees to set aside money from each paycheck, income-tax free, to be used for medical expenses — is set to change in several key ways.
Under the new healthcare reform law, people whose employers offer the accounts will no longer be able to use the funds for non- prescription drugs without a doctor's prescription. (Think antihistamines such as Benadryl or Claritin and their generic versions, or pain relievers such as Advil or Tylenol and generic versions.)
This new rule won't take effect until Jan. 1, but if you put money into an FSA account, it's worth thinking about now, because some doctors may require an office visit to get the qualifying prescription. It makes sense to ask for the documentation during a visit already planned, says Helen Darling, head of the Washington, D.C.-based National Business Group on Health, which advises large firms on handling employee health expenses.
No plans to see the doctor any time soon? Darling suggests asking a physician to e-mail, snail-mail or fax a prescription based on a recent visit without an office visit. Keep in mind, though, that some doctors' offices may charge a fee — though probably smaller than the cost of an office visit — for handling paperwork. (I recently paid $15 to have a school form filled in by the pediatrician's office.)
Before you ask for the prescription, check with the person at your workplace who handles FSAs to find out exactly what documentation is needed, says Mark Berggren, an attorney at the Lincolnshire, Ill., benefits consulting firm Hewitt Associates. Many employers will probably accept a single prescription for a qualifying drug, good for a year, that they can attach to your file.
Important: If your employer issues a loaded debit card to access FSA funds for medical expenses, you may not be able to use the card for non-prescription drugs, even with a doctor's prescription on file. More likely, you'll have to pay out of pocket and then submit a claim form for reimbursement.
All of these rules should be spelled out in the information on FSAs you get from your employer, Berggren says, but if you're not sure, ask questions.
Another big change happens in 2013. From then on, annual FSA allocations will be capped at $2,500. Currently, there is no cap, though many firms limit allocations to $5,000, says Kevin Gordon, also a consultant at Hewitt. So if you typically allocate more to an FSA than $2,500 — and only 18% of people who opt for an FSA do, according to Hewitt data — you may want to anticipate medical expenses and pay for some with your FSA account in 2011 or 2012 (One example: starting a child's orthodontia sooner, if the orthodontist agrees the time is right).
Darling says she hopes the new changes raise public awareness about FSAs and induce more people to set aside funds in the accounts. According to information compiled by Hewitt, only 1 in 5 employees contributed to an FSA in 2010, and the average annual contribution was $1,441. People are often fearful of allocating money to an FSA because money remaining in the account at the end of the year is forfeited. But consider the tax savings: According to the Employee Benefit Research Institute, a nonpartisan group based in Washington, D.C., a person making $35,000 a year who puts away $1,235 would save $282 in federal and Medicare taxes. (How much you save would depend on your tax rate and how much you tuck away, of course.)
Experts add that you also should look at FSAs as a fairly painless way to make sure you set aside the money you'll need for medical expenses. If you spread $1,441 over 24 pay periods, you'll pay in about $60 per period — and the full amount you allocate for the year is yours to use from the start of that year.
Expenses that typically qualify for reimbursement through an FSA — each firm makes it own determination and should provide a list — include insurance co-pays and deductibles, prescription glasses, contact lenses and prescribed medicines and prescription co-payments. Since firms sometimes add or take away items on the list, review yours each year to be sure you know what's covered.