All About FSAs

In June, officials announced they were enhancing the benefits available to federal workers through Flexible Spending Accounts. Employees now have a 2-1/2 month grace period for incurring expenses and an increased maximum contribution to the Health Care FSA, from $4,000 to $5,000.

All of which is less than helpful if you never signed up for a Flexible Spending Account in the first place.

So what exactly are FSAs?

FSAs allow you to make pre-tax salary contributions into a Federal Deposit Insurance Corporation insured savings account to pay for medical and dependent care expenses. The funds put into an FSA are not subject to federal income and Social Security taxes, or most state and local income taxes.

According to the Office of Personnel Management, employees can "save 20 percent to 40 percent on covered expenses" with FSAs, allowing "employees to reduce their out-of-pocket expenses and stretch their hard-earned dollars for everyday health and dependent care expenses."

HCFSA vs. DCFSA

There are two types of Flexible Spending Accounts: HCFSA for health care and DCFSA for dependent care, and employees now can set aside up to $5,000 a year in both options.

HCFSAs reserve money for medical costs not otherwise covered by insurance. Many over-the-counter medicines can be paid for with money from an HCFSA. Nonprescription antacids, allergy medicines, pain relievers and cold medicines are all eligible.

Other acceptable uses of HCFSAs include braces, acupuncture, substance abuse therapy, some infertility treatments, birth control, contact lenses, diaper rash creams, diabetic supplies, flu shots, hypnosis, laser eye surgery, pregnancy tests, psychologists, reading glasses, speech therapy, sunscreen, vasectomies and vasectomy reversals. And even Christian Science practitioners are covered, according to the FSA eligible expenses listing.

Money from a DCFSA can be used for child care or dependent adult expenses, which allow you or your spouse to attend school full time or to look for work. Use DCFSA, for example, to pay for a babysitter, summer camp, or before and after school care for children younger than 13.

Depending on your particular tax situation, it might be better to use the child-care tax credits rather than a DCFSA. You can use this worksheet to determine which option is best for you.

If you are currently receiving a child-care subsidy, then you must make sure that the total you elect to save through the FSA combined with the total of your child-care subsidy you receive does not exceed the $5,000 limit.

Details, Details

There are no government contributions to FSAs and retirees, by law, are not allowed to contribute to the program. Active military member also are not eligible to open FSAs, and not all federal agencies participate in the program.

If you do qualify, then you will have to establish a new FSA every year during the open season, from mid-November to mid-December, for the next calendar year. One downside: Money you put aside for one year does not roll over to future years, so if you don't use it, you lose it. How much money you'll use that year for these kinds of expenses could become a guessing game.

That's where the new grace period comes into play. You now have until March 15 of the following year to incur eligible expenses. That means 2-1/2 months on top of the calendar year to spend the money you put aside for the year, enabling you to avoid forfeiting unused funds. Forfeited funds are used to offset future administrative costs for running the program.

If you discover you're putting too much money into an FSA, odds are you're out of luck. There are a number of loopholes, however, that will allow you to change the amount of money in your FSA, besides open season:

• Change in your legal marital status, such as marriage, divorce, death of a spouse.
• Birth or adoption of a child.
• Your child turning 13.
• Change in cost of services, such as switching child-care providers, your current provider changing rates, or your child starting school full-time.
• Change in employment status, for you or your spouse, that affects your health insurance eligibility.
• Moving, if it affects your eligibility for health care benefits.
• Change in your number of tax dependents, such as a parent moving in with you.

If one of these life events applies to you, then you have 31 days before or 60 days after the date of the event to notify FSA official and change your contribution. You can do that by downloading this form and faxing it to 1-866-643-2245 .

After you've opened an account, you can track your balance through the FSA Web site.