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Flexible Spending Account Changes on the Way

Flexible Spending Accounts [1], 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 [2]), 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 [3] and High Deductible Health Plan [4] 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: $2,550 maximum per employee
  • 2016: $2,550 maximum per employee
  • 2017: $2,600 maximum per employee
  • 2018: $2,650 maximum per employee

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 [5], 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 [8] and how it might impact your finances. Today we’ll look at the changes to FSAs.

Check out the entire health care series: