Many people have access to flexible spending accounts, or FSAs, at work for their healthcare expenses. Using FSAs is smart, but you don't want to lose your hard-earned money.
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In this segment of Industry Focus: Financials, Motley Fool analyst Gaby Lapera talks with Dan Caplinger, the Fool's director of investment planning, about the ins and outs of flexible spending accounts. In particular, Gaby and Dan talk about the different rules that govern various employers' FSAs, including some that offer a grace period on spending down your FSA balance and others that let you carry forward up to $500 into next year. Find out what rules your employer has and make sure you follow them to avoid losing your money.
A full transcript follows the video.
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This podcast was recorded on Nov. 28, 2016.
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Gaby Lapera: The final thing we wanted to talk about is kind of tax-related, which is the flex spending account. Your FSA is for healthcare. A lot of employers have this. One of the things you're going to do is check to see if your employer has a grace period or a rollover. By law, I believe you are allowed to rollover $500 from year to year.
Dan Caplinger: That's true, but only if your employer activates that option. It's really important to go to your employer and find out what your choices are, because each employer can differ. There's a couple basic different ways that this works. A lot of employers will take either one or the other of these two things. The first one is, a lot of employers will give you a grace period. What you can do then is incur health-related expenses through March 15th of the following year and still count them against the money that you put into your flex account for the previous year. Say right now you have $500 left in your flex account. You don't foresee needing any medical expenses between now and the end of the year. Ordinarily, that money would be gone. You would forfeit it, because again, the way these flexible spending accounts work is, you pick a number upfront that you're going to take out of your paycheck and put into these accounts but if you don't use it, you lose it. But the IRS figured out this wasn't entirely fair. So if your employer offers that two-and-a-half month grace period, then you'll still have January, February, and the first half of March to incur medical expenses, in order to use up that remaining amount.
Now, the second option that employers have is exactly what you just said. They can let you take up to $500 from your previous year and carry it forward into the next year. If your employer picks that then, under the example I just gave, you wouldn't have to do anything. You would just carry forward your $500, and then whenever you spend it next year, you could go ahead and do that. The key to remember is, your employer would have to pick one or the other. The IRS doesn't let employers offer both the grace period and the carry-forward. In addition, the IRS does not require employers to offer either one of those. If you don't have either one of those working for you, you have to make sure you get that money spent down by Dec. 31, or you'll lose it. But it's worth making a call or taking a visit to whoever handles payroll and HR stuff at your company to find out exactly how your flex spending account works, and to make sure you don't lose any money in the process.
Lapera: Yeah. And the other thing is, you want to be careful that you make sure you're using your flex spending account correctly. For example -- this happened to me earlier today, I almost illegally used my FSA. I got a dental bill, I went to a dentist out of network, so my dental insurance covered half of the payment, by sending the check to me, and I needed to pay the dentist in full, and I almost accidentally paid the dentist in full off of my FSA, which is illegal, because you can't use your FSA to pay for something that you have already been reimbursed for. You can only pay for the stuff that has not been reimbursed.
Caplinger: Right. The half that they didn't pay, you would have been OK with. But the half that the insurance had reimbursed, you're right, that would have been a no-go.
Lapera: Yeah, so make sure you check the rules online, there's the IRS and a few other organizations that have pretty clear rules that you can read. Other things that you can use it for are any qualified medical expense, so, something that requires a prescription is pretty much definitely going to be covered. That includes stuff like medicine, and I think eyeglasses, correct?
Caplinger: Yeah, that's right.
Lapera: Yeah. So, those are easy ways to spend it. I don't really know, I don't know what else you might want to spend it on. Some employers have an online store that you can peruse and use your FSA in, and it has all FSA-approved items in it. I've never done it, but I've also never had any extra, because I don't put a lot into it, I only put enough into it to pay for my dentist. But yeah, just, things to think about so that you can get the most out of your money. And also, during open enrollment, you can change the amount that you put into your FSA. So, consider what your medical expenses were this year, and what you imagine they might be next year, and adjust accordingly.
Caplinger: That's right. If you have a big balance at the end of this year, think about ramping it down for next year so you don't have the same challenge. But you're absolutely right. I see any number of ads from these outfits that sell eyeglasses and contact lenses and that kind of thing. I think end of year is their best season precisely because of this, people have money they need to use up.
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