The Flexible Spending Account: A Significant Employee Benefit
Timothy R. Covington, M.S., PharmD.
President and CEO of Covington Healthcare Associates
Background
A flexible spending account (FSA) is a tax-advantaged employee savings account established by your employer. The FSA allows employees to set aside a portion of their pay, pre-tax, through payroll deduction for qualified expenses, which are usually health care expenses. FSAs save you money by reducing your income taxes. The funds set aside in your FSA are taken from your pay before your federal, state, or social security taxes are calculated and are not reported to the IRS. This reduces your taxable income and increases the amount you are able to retain from your paycheck. An FSA can save you hundreds to thousands of dollars each year depending on how often you pay for the approved health care expenses.
How much can be set aside in a FSA?
The amount of money that can be placed into a FSA by an employee is determined by the employer. The IRS limit is $5,000 per year, but most employers do not participate at this level. The coverage period typically ends at the end of the employers’ plan year (generally December 31) or at the time employment ends during the plan year.
How do I spend the money set aside in my FSA?
Many employers provide employees with a debit card that can be used for qualified purchases, such as many over-the-counter (OTC) items, including heartburn medication. The popularity of the FSA debit card is increasing, but paper claims may be required by some employers. This usually requires submitting receipts for eligible expenditures. The employee then receives a reimbursement check for the purchased items.
At this time, there is no carryover provision for funds in a FSA. This "use-it-or-lose-it" limitation means that you must spend your entire annual contribution by the end of the plan year. If you do not spend the payroll deducted amount by the deadline, it is forfeited. Some companies allow a 2.5 month grace period (March 15 if the plan year ends December 31). Currently, the IRS and the U.S. Congress are deliberating a carryover provision.
What can I purchase with my FSA?
Many high-value health care purchases are allowed with FSA funds. Among eligible high-value purchases are health care deductibles, co-payments, dental and vision expenses, blood pressure monitors, blood glucose monitors and OTC drugs. Drugs that have moved from prescription-only to OTC are particularly popular purchases. This includes drugs such as Prilosec OTC®, Claritin®, Zyrtec®, Zyrtec-D®, Advil® and Aleve®.
Drugstore.com has created an on-line FSA store. Consider visiting
http://www.drugstore.com to learn more about eligible purchases.
