The United States is a great place to live. We’ve got foot-long hot dogs, demolition derbies, twenty-lane interstate highways, and more ways to gyp the government out of income taxes than I could ever write about. While I’m still young and haven’t yet had the chance to experience the full range of tax credits, deductions, and incentives, there’s one option currently available to me that’s looking more and more appealing every day: the Flexible Spending Account (FSA).
For those people reading that are fresh out of the womb and don’t know what an FSA is, here is a simple explanation. FSA is a magical land where you can send some of your before-tax paycheck dollars. Once in the magical land of FSA, that untaxed money can then be withdrawn to cover certain expenses. Sounds fantastic, right? Time to start shoveling every penny into FSA Land, right? Well, the government’s not that dumb; there are some limitations that prevent you from using that money to buy, say, 100 Ferraris with untaxed income. For starters, FSA money can only be spent on two main categories of expenses: medical and dependent care. Eligible medical expenses include things you might expect–doctor bills, copays, prescriptions, and many other common health care expenses that might not be covered by your insurance–along with a bunch of items that might not immediately occur to you are qualified medical expenses–over-the-counter drugs, medical hypnosis, and weight loss programs to name a few. Eligible dependent care expenses are a bit harder to list, but they generally cover assorted costs associated with caring for a child younger than 13 or an elderly relative or disabled child of any age. Whereas health care spending accounts have a pretty well-defined list of qualifying expenses, dependent care FSAs seem to take more of a “not these items” approach.
The other big gotcha of Flexible Spending Accounts is their “use it or lose it” clause. Any money you put into FSA Land during a particular year must be used before the end of that year or else it disappears into another magical land: The Land of Ha Ha, Your Money’s Gone and You Ain’t Gettin’ It Back. Starting in 2006, employers now have the option of extending the deadline to use FSA funds to the middle of March the following year.
Deciding whether or not to use an FSA and how much of your paycheck to set aside can either be really simple or somewhat difficult. If you know you’re going to spend $5,000 a year on, say, your child’s day care, just max out your dependent care spending account since the IRS says $5,000 is the maximum anyone can put into a dependent care FSA per year. Of course, if you don’t have kids or other qualifying dependents, it’s an easy choice to leave the dependent care FSA empty. Except for unexpected situations that I hope no one ever experiences, dependent care expenses are easy enough to estimate a year in advance, so some careful planning and smart calculations should help everyone make the most of this flavor of FSA without ending up wasting those wonderful pre-tax dollars.
Medical FSAs, in my opinion, are much harder to use “perfectly.” Unless you’re going to use the maximum allowable annual benefit (which is set by individual employers, not the IRS, though many companies I’ve seen stick with the $5,000 value), you’re either going to lose the leftover money in your FSA at the end of the year or you’ll have more expenses than you have pre-tax dollars set aside to cover. The second outcome seems more difficult to avoid since planning for big, uninsured medical expenses from year to year is much harder than anticipating dependent care expenses. Avoiding wasted FSA dollars can also be tricky, and it’s the main reason I haven’t put a dime into one since I started working. Apparently three percent of FSA dollars are wasted each year, but your employer thanks you since they can use that money to cover the costs of operating FSAs. Since my wife and I are generally healthy and have insurance, our FSA-eligible medical expenses per year come down to a couple of doctor copays and maybe some Tylenol and cough syrup. In a good year, we’ll spend under $100 on eligible medical costs, and my employer won’t let us put any less than $100 in an FSA annually. Now if you consider the tax savings on $100, we’d actually break even as long as we spent at least $75 of that money.
I think I’ll be able to talk myself into going with a health care spending account either this year or next, even if it’s just at the minimum amount. If you’re in a similar situation, or you already have an FSA and need to find ways to spend your FSA balance before year end (or March 15th of the following year if your employer allows), consider the items below on which you can spend those precious before-tax funds.
Some Items Covered By Medical Flexible Spending Accounts
- Over-the-counter drugs. Thank you, IRS, for deciding back in 2003 that allergy medicine, pain relievers, antacids, and a host of other medical goods available without a prescription are eligible for FSA spending. If your FSA year is coming to a close, check the dates on everything in your medicine cabinet and make a trip to the drug store to replace the expired ones. Also, anti-fungal creams make great Christmas gifts for the entire family, so stock up! Unfortunately. there’s one item that’s “missing” from the list of covered medications: vitamins. That said…
- Vitamins … if your doctor says so. We’ve been told for years that a multi-vitamin as part of a balanced diet is good for us, and so millions of us take those vitamins without so much as a suggestion from a physician to do so. Instead, talk about vitamins with your doctor and convince him to give you a letter of medical necessity that will make those vitamins eligible for FSA coverage.
- Baby factories. If you’re trying to crank out the kids and you find that you might need a little help from modern medicine, these expenses can be covered by your FSA. All the bases from extraction to injection are eligible: embryo and sperm storage, in-vitro fertilization, and even sperm washing! (I don’t think I want to know what that last one is.) Of course, if you’ve got all the children you want, or you’re happy keeping the kid count at zero, there’s also…
- Condoms. While being a good Catholic boy keeps these out of my medicine cabinet, condoms and various other birth control implements are just screaming for your FSA dollars. Heck, I know a few people who could hit their employer’s FSA maximum every year with just this category! You can even get more permanent methods of birth control performed with FSA money.
- Contact lenses and eyeglasses. Tired of running into walls and the wrong bathroom at work? It might be time for a new pair of prescription glasses or some contact lenses. They’re fully eligible, and they can even be used to start fires if you’re ever stranded on a desert island. Me, I’d like to be stranded on a dessert island, so I might need the next item when I make it back to civilization…
- Weight loss programs. If your doctor tells you it’s time to lose that extra 600 pounds, you may be eligible to put FSA money toward the various costs associated with doing so.
- Counseling. Depressed? Insane? Underperforming in the bedroom? Many types of licensed counselors are FSA-eligible and waiting to talk to you about your childhood or your obsession with sniffing women’s shoes.
- Dancing lessons. Some doctors think dancing will help you recover from injuries faster, and they’ll sometimes even prescribe it! If they do, you’re in luck because you can use your FSA to pay for the lessons. Just please, don’t break a leg on purpose so you can learn to tango.
- Flu shots. The best tax-free dollars you’ll ever spend on your health.
- Laser eye surgery. I really wish this meant that you could get attachments to make lasers shoot out of your eyes, but being able to see better is nice, too. This can be pretty pricey and many insurance companies won’t foot the bill for it. Using your pre-tax FSA dollars is like a 10-30% discount for expensive elective procedures like this one.
- Transferring medical records. Sometimes you’ll have to pay a small fee to have your old doctor send medical records to your new one. It’s probably just a few bucks, but why not use your FSA dollars instead of the ones in your wallet?
- Orthodontia. If you’ve got four kids with crooked teeth and a big chunk of your weekly paycheck is going to paying for their braces or other orthodontia, use FSA dollars that might be forfeited at the end of the year on any such items you may have on an installment payment plan. Or just use FSA cash to pay for them in full at the time of purchase.
- Alcohol treatment. Give the gift that keeps on giving: send your drunken spouse to a rehab clinic, and pay for it with his or her FSA dollars.
- Swimming pool/spa. Remember how vitamins are eligible if your doctor gives you a note? So are swimming pools and spas! If you can convince your doctor (or your doctor convinces you) that a swimming pool or spa would be of benefit to your health, your FSA dollars can be used to pay for its installation and maintenance. I don’t think there’s a person alive who wouldn’t experience some health benefits from a swimming pool… well, maybe people with hydrophobia. Unfortunately, any “The government helped me pay for this pool” signs will have to come out of your own after-tax pocket.
There are many other eligible costs not on this list. And before you start calling your local ballroom dancing school or spa supplier, please talk to your doctor and human resources department to make sure that you will receive reimbursement for these expenses.
One bonus tip: if your annual FSA is funded by payroll deductions over the course of the year, you can “borrow” against money you have not yet made using your FSA. Say you put $100 a week into your FSA. Untouched, your FSA will have about $5,200 in it by the end of December. But then your doctor says, “Sorry, Bob, but you medically need that Olympic-sized swimming pool right now,” and it’s only April! You can take out all of the $5,200 you pledged to put into you FSA at any time during the year, even if you haven’t had the full amount deducted from your paychecks yet.