How to spend FSA money
Do you have FSA funds left in your Flexible Spending Arrangement? If you overestimated your medical expenses for 2016, you might lose that money under the use-it-or-lose-it rule. That means you have to spend all your FSA money by Dec. 31 unless your plan allows you to carry over a small amount into the next year.
The maximum you could have put toward a flexible spending arrangement is $2,550 for 2016, the same amount as 2015. The FSA maximum amount for 2017 is expected to rise $50 to $2,600.
It used to be really easy to do until a couple of years ago. In January 2011, a sweeping change made to FSAs went into effect which made it a lot more difficult to spend FSA dollars in a pinch. As a result, many FSA users have become a lot more careful about the amount they put into their account.
If you are one of those unlucky few (or should I say lucky, because you didn't spend as much in medical expenses as you anticipated) who still have FSA dollars left in your account, keep reading.
What to Know About Your FSA
- Check your employer's policy: The first thing to do is remind yourself what your employer's policy states regarding the FSA they offer. Some employers allow you to carry up to $500 into the next year or offer a grace period of up to 2½ months after the end of the plan year. They can either offer a carryover or a grace period, but not both. So check the policy to see what you have to work with and go from there. (A grace period of 2½ months, for example, would mean you have until March 15, 2017, to finish spending your 2015 FSA contribution.)
- Understand what can be purchased using FSA dollars: The next step to spending FSA dollars wisely is to check the IRS rules on what is or isn't a qualified medical expense under the FSA guidelines. As a general rule of thumb, every expense should have a medical need and every medicine should have a prescription. (It cannot be for cosmetic purposes unless it's needed to treat a disease, for example.)
How to Spend Your FSA Dollars
First, check your records: Review your bank, credit card records, and medical bills to make sure you've submitted all your co-pays and expenses to date. Then…
- Work with your doctor: It used to be that most of the over-the-counter (OTC) medications could be purchased using FSA dollars, but that's not the case anymore. You need a prescription for everything you buy. Some OTC medications, even with a prescription, have to be paid out of pocket and then reimbursed from the plan by submitting a claim. Doctors are very understanding about these situations and are willing to work with you. At least that has been my experience. I have asthma and my doctor was happy to give me a prescription to stock up on allergy medications for the fall. If you have a medical need that is seasonal, talk to your doctor and get a prescription to stock up. Also, your doctor might provide prescriptions for other items you normally need but just buy OTC, like vitamins or blood thinners.
- Get your physical, vision, and dental checkup: If you are due for a physical, vision, and dental checkup, that would be an excellent way to put your FSA dollars to good use. You could splurge and get eyeglasses with all the bells and whistles like UV coating, anti-glare, etc.
- Update your emergency/first aid supplies: When is the last time you checked your first aid cabinet? Go through it and find if everything is up to date and not expired. If any of them have expired, update them. If you have only one set at home and you are in a multi-level house, it might be useful to have a first aid kit on each level. And don't forget your cars.
- Plan for next summer: Do you plan to spend a good chunk of time on the beach next summer? Stock up on sunscreen with high SPF (30 or higher).
- Think about future needs: If you are pregnant, hoping to breastfeed, there are plenty of nursing related supplies (breast pump, nursing pads, nursing cream, etc.) you can stock up on. And if your baby is on a special diet formula, talk to your doctor and get a prescription for that particular formula. It will be eligible as a medical expense (regular formula doesn't come under this). If you plan on getting pregnant, pregnancy test kits or fertility monitors might come in handy. Or, if you don't want to get pregnant now, maybe you want to stock up on birth control supplies.
- Play doctor: Sometimes it is very useful to have basic medical equipment at home like a stethoscope or blood pressure monitor. My daughter's pediatrician taught me how to listen to my daughter's lungs and look in her ear for signs of ear infection. Of course, this is not to replace a doctor, but it is very helpful to give some basic information to the nurse when I book an appointment for my daughter with her doctor.
- Treat yourself: When used for preventive care, hot/cold packs are eligible for FSA spending. You can relax a little and ease any pains you have after a hard day's work with a hot/cold pack and buy them with tax-free dollars.
- Don't forget miscellaneous expenses: You might remember to submit a reimbursement request for medications but something like the shipping and handling fees might fall through the cracks. If you paid for shipping to get your contact lens solution delivered to your home, that is an eligible expense. Make sure to include that in the reimbursement. And don't forget to claim commuter costs. The cost for driving to and from the doctor's office along with any parking fees are all eligible expenses.
- Educate yourself: If you have a medical need (diabetes or weight-management problem), the classes you attend to learn how to manage those medical needs come under eligible expenses. You will have to submit a letter of medical necessity; your doctor should be able to help you with that. In the same vein, if it is medically necessary, you can even pay for some exercise equipment using FSA money.
Related >> Saving for health emergencies
What Are the Benefits of an FSA?
According to the Internal Revenue Service, these are the benefits of an FSA (IRS Publication 969):
- “Contributions made by your employer can be excluded from your gross income.
- “No employment or federal income taxes are deducted from the contributions.
- “Withdrawals may be tax free if you pay qualified medical expenses.
- “You can withdraw funds from the account to pay qualified medical expenses even if you have not yet placed the funds in the account.”
Plan for Next Year
Your FSA money is tax-free money; however, it is still money that could be put toward a different goal if it ends up that you don't actually need it for medical expenses. So it is important that you estimate as accurately as possible — and plan conservatively — when determining how much to sock away in a flexible spending account. End of the year is an excellent time to review all the medical expenses for the past year and think about what your expectations are for the upcoming year. Again, the limit on what you can put into an FSA is $2,600 for 2017, up $50 from 2016.
Do you have any left-over amount in your FSA? How are you planning to spend it?