This weekly Q&A addresses questions from real patients about healthcare costs. Have a question you'd like to see answered? Submit it to AskChristina@nerdwallet.com.
I contributed to my employer-provided FSA for the first time this year, and I overestimated how much money I would use on health care expenses. I don't plan to use these funds before the end of the year. Is there some way to use the money or move it so it doesn't go to waste?
I'll start with some background on flexible spending accounts, or FSAs. FSAs are accounts set up through your employer that allow you to set aside pre-tax dollars for qualifying medical expenses. The money is taken out of your salary, before taxes, and put in an account, where it remains until you make qualifying purchases. Because the money is taken before taxes, not only do you have money earmarked when out-of-pocket medical expenses arise, but you also minimize your tax burden by reducing your taxable income.
Employees choose how much money to contribute to their FSA during open enrollment, which typically occurs in November or December for the following year. It's easy to overestimate your medical expenses and wind up with more money in your FSA than you know what to do with. Fortunately, some FSA plans have safeguards in place to help make sure you don't lose the money you've set aside, and for those that don't, a little research can go a long way in making sure you get the most out of this end-of-year crunch.
You may be able to move your FSA money if your employer allows carryovers
Generally, FSA accounts are "use it or lose it" plans, which means if you end the year with a balance, you lose that balance. However, that isn't always the case. An IRS rule change in 2012 allowed employers to opt for a carryover of up to $500, giving employees the ability to carry a balance into the next year. Not all plans include a carryover, and some set it below the $500 maximum. If your FSA does have a carryover, any remaining balance above that limit will be lost if it is not spent.
In addition to carryovers, some plans have grace periods at the end of the year. The maximum grace period is 2½ months, during which you can use the remaining FSA funds on qualifying medical expenses.
Your FSA plan may have a carryover or a grace period, but IRS laws dictate that it cannot have both. Make sure to check with your employer to learn the specific rules for your account in 2014.
Use your FSA funds by the end of the year on a qualifying medical expense
Using your FSA funds when you're down to the wire may be difficult, depending on how big your balance is. But understanding what's covered under the IRS definition of "qualified medical expenses" could help you to identify some services and products worth spending on.
Qualified medical expenses are those that you can include in your medical and dental expense deductions on your income tax return. They are the costs associated with diagnosing, mitigating, treating or preventing disease or illness, including equipment, medications, supplies and out-of-pocket health care costs. More simply: FSA-qualified expenses are for those products and services that are medically necessary and would be deemed as such by a physician.
Here are a few things that are not FSA-qualified:
- Over-the-counter drugs, unless you have a prescription
- Treatments and products solely for cosmetic benefits (plastic surgery, spa treatments, anti-aging creams, etc.)
- Products like vitamins, unless prescribed for a specific deficiency or for treating an illness, disease or diagnosis
Spend your FSA funds on supplies or treatments you might not get otherwise
If there are any doctor's appointments you've been putting off, now is the time to make them so you can spend your FSA dollars before you lose them. But beyond your regular visits, it's time to give thought to additional medical care that could benefit you in 2014. Here is a list of FSA-qualified expenses:
- Bandages including elastics for sprains/strains, and adhesives for scrapes/cuts
- Blood-pressure monitor
- Chiropractic care
- Dentures, adhesives and cleaners
- Diabetic supplies including glucose-testing equipment
- First-aid kit
- Heating pad
- Hearing exams and aids
- Lasik eye surgery
- Medical ID bracelet
- Non-cosmetic dental treatments including crowns, implants and sealants
- Orthotic inserts and arch supports
- Pregnancy and ovulation tests
- Smoking-cessation programs and medications
- Vision exams, eyeglasses and contact lenses
Additional services may qualify for FSA funding with a doctor's prescription. Over-the-counter drugs, infant formula, skin care products and even home exercise equipment are just a few expenses that could be FSA-eligible if you have approval from your physician for these medical products.
Re-evaluate next year's FSA contributions
During this year's open enrollment, you'll decide how much to contribute to your FSA in 2015. Because you overestimated your expenses in 2014, move forward with lessons learned. Use this year's actual expenses as a starting point for your projections in the coming year.
It may be as simple as reducing your contribution by the amount you struggled to spend this year, but don't forget to account for new expenses in 2015, including any anticipated surgeries, medical bills and prescription drug changes.
When you're under pressure to spend or lose your FSA balance at the end of the year, you may end up using those pre-tax dollars for goods and services you wouldn't normally need. But don't let last year's mistakes prevent you from taking advantage of this opportunity to save in the future.