In two short weeks, 2007 will come to a close. If you have money in your Flexible Spending Account when the new year comes around, and your company doesn’t offer a grace period, you will lose those funds.
A Flexible Spending Account is a savings plan offered by many employers that lets you put aside some money from your paycheck each week. The money is saved in an account held by your employer. With a Health or Medical FSA, the most common type of FSA, you can use the account for medical expenses. Either you can receive a debit card linked directly to the account for use when paying medical expenses or you can apply for reimbursement of expenses paid otherwise.
The primary benefit of these accounts is the money used for reimbursement will not be subject to income tax. However, you have to use the funds put aside by either the end of the year or by a date such as March 31, depending on your employer’s rules. Since you enroll in the FSA in the prior year, you have to predict your future medical expenses. If you have a pretty good idea of what your expenses will be, you can determine how much you’ll save through the use of an FSA account. It’s just a question of subtracting your used medical expenses from your gross income (upon which tax will be deducted) rather than your net income. This is a particularly good option if you don’t itemize your tax deductions or if your health expenses won’t reach the threshold of 7.5% of your Adjusted Gross Income to qualify.
A poor prediction means you’ll be leaving money on the table at the end of the year. If your prediction was not far off, there are still some options that will prevent you from losing the money you put away. Here is what I would suggest. Go to the pharmacist and pick up over-the-counter medication. I probably spend about $25-$35 a year on regular strength pain relief medication (naproxen). If I had a Flex account, I would stock up at the end of the year. Cold and allergy medicine qualifies as well, and the weather makes the end of the year a good time to stock up. First aid supplies qualify as well.
In many cases, the FSA can be used to cover expenses for your family members, as well. Make sure you have been reimbursed for every medical expense throughout the year by going through your receipts if you’ve kept them. Speaking of receipts, it’s important to keep documentation for all medical expenses you’ve paid, whether directly from your Flex account via a debit card or for reimbursement later. In many cases, you will be required to substantiate the qualification of your expenses.
By the way, if you end up leaving unused money in your FSA at the end of the year, that money goes back to your employer, not to you. Also, you will owe income tax on the remainder even though you won’t “receive” that income.
Note: This article is a contribution to the Money Blog Network Monthly Group Writing Project. This month, the focus is on year-end financial strategies. Here are the other articles included in the project, all with great ideas for things to think about as 2007 comes to an end.
* Time to Rebalance Your Portfolio
* Dumb Year End Money Moves
* Clearing Out Your House For Fun and Profit
* Jump Start Your Debt Reduction Using Christmas Gifts and Year End Bonuses
* Make Your Charitable Deductions Before Year End
* Grab Some Year End Bargains
* Paycheck and Witholding Calculators for Year End Money Moves
Updated December 29, 2010 and originally published December 17, 2007.