Flexible spending plans allow employees to save pre-tax dollars from their paychecks to pay their out-of-pocket health care expenses, such as co-pays, deductibles, prescription eye wear and vaccines. In 2013, the Affordable Care Act reduced the amount an employee could defer to a flexible spending account. The maximum amount now is $2,500. In previous years, the amount was generally $5,000.
Unlike a health savings account, flexible spending plans also have a “use-it-or-lose-it” rule. Unused dollars left in the plan at the end of the plan year are forfeited. However, in October 2013, the U.S. Treasury Department announced a “tweak” that employers may adopt: a $500 carryover rule.
If your employer adopts the new rule, you may be able to carry over up to $500 of unused money in your flexible spending account to the following year. Your employer must amend its plan documents to allow for this change. Employers can do this for plan years that began in mid-2013 and for 2014 plan years. Adoption of this rule eliminates any grace period that allows employees to spend unused money in the two and a half month period following the end of the plan year. Your employer’s plan also has the option to specify an amount less than $500 or decline the adoption of the carryover rule altogether.
Most flexible spending plans are part of Section 125 cafeteria plans, which require employees to make elections of how much of their salary is deferred to the plan prior to the beginning of the plan year. Money is deferred from your salary pre-tax to an account that your employer can later use to reimburse you for qualified medical expenses. For most individuals, it is a guessing game as to how much you think you might spend on medical services within the next year. The current use-or-lose provision is also why you’re likely to find a waiting line at your dentist’s office in December. Critics say the use-it-or-lose-it rule encouraged this unnecessary spending.
If your employer’s flexible spending plan chooses not to adopt the carryover rule until 2014, you should spend down your account this year. You may want to consider some of the overlooked expenses that are considered eligible expenditures, including orthodontia, dental fillings and extractions; chiropractic and acupuncture services; contact lenses, cleaning solution, prescription sunglasses and reading glasses; insulin and diabetic supplies; infertility treatments, pregnancy tests and contraceptives; hearing aids and batteries, and genetic testing for the breast cancer gene. You should contact the administrator of your employer’s plan prior to any expenditures to ensure they will be reimbursable.
Remember, genetic testing for paternity; cosmetic procedures, such as teeth whitening, face-lifts or hair transplants and over-the-counter medications are not eligible medical expenses.