If you’re in the throes of making your health insurance choices for 2013 at work, you may need to decide whether to sign up for a Flexible Spending Account, or FSA. Before you do, you’ll want to know how the rules are about to change in January and how to get the most out of this employee benefit in 2013.
How an FSA Works
A Flexible Spending Account lets you pay out-of-pocket medical and dental expenses with tax-free money deducted from your salary. Roughly 33 million Americans use FSAs to help shoulder such costs as health insurance co-pays, medical and dental exams that aren’t covered by insurance, alternative medical treatments and blood pressure monitors.
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How the Rules Will Change in 2013
Here’s the big FSA change that’s coming: Traditionally, employers were free to set the maximum amount their employees could put into FSAs; most settled on $3,000 to $5,000. But beginning in January, Obamacare will limit annual FSA contributions to $2,500.
So if you’re contemplating a big-ticket medical expense in 2013, like Lasik eye surgery or dental implants, your tax-free dollars may not cover it. “All you can do about that is try to plan wisely,” says Paul Fronstin, director of the health education and research program at the Employee Benefits Research Institute in Washington, D.C.
What Won’t Be Changing
One thing that won’t change next year is the “use it or lose it” rule.
You’ll still forfeit any FSA money you don’t use by your employer’s deadline, which is typically year-end but sometimes mid-March of the following year. The U.S. Treasury Department is considering revising this rule, perhaps letting employees roll over a portion of unused money to the subsequent year.
As you may know, the health care law has been chipping away at FSAs for a few years. Since 2011, over-the-counter drugstore products, like aspirin and contact lens solution, generally haven’t been eligible for FSA reimbursement. (There’s an exception to this rule, as you’ll see below.)
How to Get the Most Out of FSAs
With the new cap on reimbursements, you’ll want to think carefully about how much you can safely stash in your 2013 account.
Reviewing your 2012 medical bills is a good way to start, especially if you have recurring expenses. Here are four other planning points to keep in mind:
1. Your health plan may require higher out-of-pocket costs in 2013. Health insurance premiums, deductibles, co-pays and out-of-network charges — all eligible FSA expenses — will likely be higher next year, as employers continue shifting more of their health expenses to workers.
On the other hand, remember that Obamacare eliminated co-pays for many preventive services.
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2. You can claim FSA medical expenses for dependents who aren’t covered by your plan. As long as a dependent is not covered by another insurance policy and the costs qualify as legitimate FSA expenses, you can submit them for reimbursement. For instance, you may be able to use the FSA to pay for dentures or hearing aids for a parent on Medicare.
3. With your doctor’s authorization, you can claim higher FSA expenses than you might realize. Weight-loss program fees, transportation to AA meetings and lead-paint removal are all reimbursable if a physician certifies that they serve your medical needs (or a dependent’s).
You can even use your FSA to pay for such over-the-counter drugs as Prilosec and Claritin — but only if your doctor writes a prescription for them.
For a complete list of medical expenses that are and aren’t eligible for FSA reimbursement, download a copy of IRS Publication 502.
4. You might be able to contribute to more than one FSA. If you and your spouse both work for employers offering FSAs, each of you can contribute up to $2,500, for a total of $5,000. Or perhaps you work for two employers and can stash away money in two different FSAs.
That could be good for your health — and your finances.