Flexible Spending Accounts, or FSAs, are an excellent way to pay for healthcare expenses using pre-tax money.

If you take full advantage of FSAs (find out how much you should put in your FSA), you can save money on eligible expenses ranging from over-the-counter medicine to the cost of transportation to and from your doctor’s office.

In the near future though, flexible spending account rules and flexible spending account limits will be more regulated than they have been in the past. The changes for flexible spending accounts will be phased in over the next few years.

Flexible Spending Account Changes

  • OTC Medicines: Beginning in 2011, FSA funds cannot be used for over-the-counter medicines unless specifically prescribed by a doctor. In 2010, FSA funds can be used for OTC drugs and other items such as eyeglasses, contact solution, bandages and non-prescription forms of birth control.
  • Contribution limits: Beginning in 2013, FSA contributions will be limited to $2,500 each year with annual inflation increases. Today, there are no standard limits, though most employers cap the maximum somewhere below $5,000. Most people put away less than this, but if you are one of those who takes full advantage of your employer’s current maximum, you may see a reduction in the amount you are able to save in the future. Note that this new limit is per employee, regardless of whether you cover just yourself or your full family. The combination of a Health Savings Account and High Deductible Health Plan could allow you save more than double this amount tax-free if you are covering a family. Of course an HDHP is not for everyone.

FSA Contribution Limits By Year

Be sure to check with your employer as 2011 and 2012 FSA limits will still be designated by employers:

  • 2011: No limit, most employers use $5,000 maximum
  • 2012: No limit, most employers use $5,000 maximum
  • 2013: $2,500 maximum per employee
  • 2014: $2,500 maximum per employee
  • 2015: Indexed to inflation

FSA Impacts and Planning

Because the earliest changes won’t take place until 2011, and won’t be fully phased in until 2013, you have the opportunity to do a little planning. If you have been putting off expensive things like laser eye surgery or braces, consider planning to do those things in 2011 or 2012 so that you can fund a larger portion (or even the whole thing) with pre-tax funds.

If you are in the 25% tax bracket, you save $250 for each $1,000 you put in an FSA and subsequently use on approved expenses! As an example, saving $5,000 in an FSA in 2012 and using it to pay for braces will save you $625 in taxes compared to paying for them in 2013 when you can only save $2,500 in your FSA, and $1250 in taxes compared to not using an FSA at all.

In addition, plan to fully stock up on over-the-counter medicines (and other things that don’t require a prescription, such as reading glasses) at the end of 2010. Once 2011 hits, be sure to ask your doctor for a prescription for OTC medicines that you truly depend on, such as certain brands of eye drops or allergy medicine.

Lastly, remember that some things about FSAs won’t change. For instance, the amount you choose to put away each year will expire at the end of the year or shortly after, so don’t put away more than you can reasonably expect to spend.

More Flexible Spending Account Information

We’re continuing our in-depth look at the new health care bill and how it might impact your finances. Today we’ll look at the changes to FSAs.

Check out the entire health care series:



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Comments to Flexible Spending Account Changes on the Way

  1. The $2500 limit shouldn’t be that big a deal now that OTC are not claimable. Most Americans keep a level much below $2500. However it will create a lot of paperwork and doctors visits as people get prescriptions for Tylenol and other other common OTC drugs. Also, if both husband and wife work, then $5000 is still the FSA limit for the household I believe.

    Andy

  2. It works for some but not all. My wife is a stay at home mother and I currently spend well over $5k per year in medical expences withoug OTC anyway. I still have 2 kids to put braces on. Can’t wait for the end of Obamacare

    Chris

  3. And Obama says he didn’t increase taxes on the middle class? I’m hurt already with the OTC. The man is dreaming if he thinks he’s going to be re-elected. He’s hurting everyone with rules like the flex spending! Many in my company use the max for the medical spending plan!

    Anna

  4. This is seriously going ti hurt. Eyeglasses, contacts,and whether you have young children or aging with meds being added all the time a decrease is just going to hurt! Smarter would be to allow the $5000 each whatever isnt used can carryovet. If you have leftover fund when you retire, you cash it in and pay the tax man then. Like retirement, it will be taxed at a hugher rate and if you get really sick long term, you will have funds yo pay fir it

    Teresa

  5. Hate to burst your bubble, but Congress (Senate and House of Reps) makes the changes to Flex Spending Account guidelines along with the IRS–not Obama. Write to your elected officials to voice your complaints about FSA’s.

    A new FSA issue for me for this year is that my FSA company refused to cover the anti-reflective coating for my glasses without a note from the doctor. They said it was a new regulation, but I couldn’t find anything about it in the FSA guidelines from the IRS. I think the FSA company is just trying to be difficult so they can keep the money. My doctor LAUGHED at the FSA company’s request because it’s so absurd. Fun times.

    Katie

  6. Yes everyone Obama and Obamacare have nothing to do with this. It is IRS rules and they control. Need to get rid of the IRS. Also Obamacare is what allowed me and others to keep our children on our health plans until 26 rather than through 18 birthday which is a good thing.

    Joan

    • IRS is doing this BECAUSE of OBAMCARE. They need to bring in more tax revenue to pay for it. They just didnt pull this move out of thin air.

      Bret

      • Sorry, Bret. The IRS isn’t reponsible for paying for any particular government programs — not even itself. Paranoia and misinformation do no one any good.

        Joseph


  7. Medical bills should be tax deductible without a minimum. This FSA business is ridiculous and forfeiting the money you don’t use is such a scam. I use an FSA every year but always end up underfunding it because I’m afraid I’ll end up forfeiting excess money.

    John

  8. I am happy for any financial help that I can get. I m not happy with the FSA changes and will voice my displeasures with the system using my vote in November.

    John kopchik

  9. I am very disappointed in the new changes because, I have a child with type 1 diabetes and with his medicine and pump supplies alone I will use up the new cap of $2500. I am very thankful for whatever I can save. Health care is rising and we are being limited at every turn.

    Anita


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