Flexible Spending Accounts: New Rules Mean New Choices
If you don’t, you should.
Medical flexible spending accounts, also known as FSAs, allow employees to put up to $2,500 per year into a dedicated account to cover certain out-of-pocket medical expenses. Because the money comes out of the paycheck before taxes, these accounts can save employees some money on their tax bills while also providing a cushion to cover unanticipated medical expenses.
However, the passage of the Affordable Care Act resulted in some important changes to FSAs, and if your employees aren’t aware of them, they could be in for some unpleasant surprises.
Use It Or Lose It? Not Necessarily
Prior to 2014, most FSA plans were a use it or lose it proposition: If you didn’t spend all of the money you put into the account by the end of the plan year (usually December 31) it was gone forever. Some plans did offer a grace period of up to 90 days, but for most people, maximizing an FSA meant scrambling to spend everything in the account by the end of the year.
Under the new rules, plans have the option of either offering a grace period until March 15, or allowing employees to roll over up to $500 until the next year. However, federal guidelines prohibit plans from offering both options and they do not require plans to offer either option. In fact, only about half of all employers plan to allow the rollovers this year. In either case, now is the time to let employees know what their options are.
How Can FSA Funds Be Spent?
Another major change to FSA plans this year are the restrictions on how the money can be spent. In the past, the list of eligible expenses was broad, and covered everything from over-the-counter medications to alternative care, such as chiropractic and acupuncture.
Some of those items are still eligible for payments, but the restrictions have become tighter. In order to qualify for payment via an FSA, a doctor must prescribe an over-the-counter medication. For example, if your doctor recommends that you take acetaminophen for pain, or use an over-the-counter yeast infection treatment, he or she will need to write a prescription that you can submit along with your receipt in order to be reimbursed from your FSA.
This new rule applies to any over-the-counter treatment that is considered a medicine or drug; it does not, however, apply to purchases of medical devices like crutches, blood pressure monitors, breast pumps, heating pads, or diabetes meters. Diabetics can also still purchase insulin using FSA funds, even if they do not have a prescription.
The restrictions on over-the-counter medications are the only major change to what can be purchased with FSA funds this year. The money can still be used to cover co-payments and deductibles for office visits and prescriptions, in addition to vision and dental care. You still cannot use your FSA money for cosmetic treatments like tooth whitening, but it can pay for an extra cleaning or a stylish new pair of specs.
One of the most common complaints about FSAs has always been that it’s difficult to predict your annual medical expenses, and therefore calculate how much money to put away. Many people either lose hundreds of dollars at the end of the year, or go on an unnecessary spending spree.
On the other hand, some people who relied on FSA funds to cover significant expenses, such as orthodontia, have been stymied by the account limits established in 2013. Prior to 2013, employees could contribute up to $5,000 (depending on their plan) to their account. In 2015, the contribution limit will rise slightly to $2,550, as 2014 marked the first year in which a new policy tied the cap to the consumer price index.
According to the methodology set forth by the Affordable Care Act, the annual FSA account limit will be set in accordance to the CPI at the close of the 12-month period ending on August 31. The ACA calls for the annual indexed amount to be rounded down to the nearest $50, so when the CPI on August 31, 2013 was $2,542, the annual cap for 2014 was set at $2,500. However, the indexed amount on August 31, 201 was $2,583, so by rounding down to the nearest $50, the 2015 cap will be $2,550. Keep in mind, as well, that the cap is not per household or per tax return, but per employee, so technically a husband and wife could put away $5,100 in 2015.
However, determining how much of that amount you actually put away depends on your own needs and spending patterns. When determining your 2015 contributions, analyze how much of your 2014 contributions you actually spent. If you have too much money, or are able to roll over hundreds of dollars, you might consider contributing less this year.
In any case, if you have an FSA, take some time to figure out your options before the year ends. While you may not lose money as you did last year, or have to buy loads of bandages and cough drops to use up your money, you still need to maximize your investment.