You have until December 31, 2012 to use the money you’ve put in your Flexible Spending Account (FSA) or flexible spending arrangement. Check your balance and make sure that you’re on track to spend every dime in your account. An FSA allows an employee to defer a portion of their pretax earnings to defray the cost associated with health care expenses for themselves and eligible dependents. Rules prohibit the account holder from allocating the funds in a FSA to reimbursed health care expenses.
An individual can realized substantial saving on income and FICA taxes. Money set aside for a FSA does not account towards an individual’s Social Security benefit. You can withdraw funds from an FSA monthly or take a lump-sum reimbursement at the end of the plan year.
“Use It or Lose It”
A major disadvantage to flexible spending arrangement concerns the “use it or lose it” rule. This simply means any contributions made to the account is lost if the employee does not use the funds by December 31, 2012.
Although most employers cap the FSA limits to $5,000, IRS does not have a limit for FSAs. This rule changes beginning in 2013 when the maximum allowable contribution that can be made to an FSA is $2,500.
Individuals who would like to familiarize themselves with eligible deductions for their FSA account should read IRS Publication 502 or talk to your accountant. Consider all health insurance co-payments, deductibles, as well as dental, medical and vision care expenses not covered under health care insurance plan.
The rules require the costs to be “medically necessary” as determined by a doctor. You can only receive reimbursement for expenses incurred during the coverage period. The rules allow account holders to receive reimbursement for any lump-sum prepayment of orthodontia expenses. You will have to substantiate a claim before receiving reimbursement.
If you have a dependent care flexible spending account, you can use the funds to pay for qualified expenses for dependents that live with you while you work, such as child care expenses for dependents under the age of 13. You can also receive reimbursement for mentally or physically disabled children of any age that cannot take care of their selves.
Individuals who have adult day care for senior dependents, such as parents and grandparents, can also receive reimbursement for their costs. You must list dependents on your federal tax return.
You cannot use the FSA funds for the following expenses:
- Premiums for medical or dental plans for you or your spouse
- Nursing care for a healthy child
- Marriage counseling
- Domestic help for non-medical related services
- Elective cosmetic surgery
- Recreation and health club charges
- Swimming pools, hot tubs or exercise equipment
- Costs not incurred during the plan year
If you are unsure about the availability of the funds for certain expenses consult your tax professional for advice on how to proceed.
This article was first published on http://moneyprime.com.