Drain Your Flexible Spending Account While You Can

Depleting the remaining funds from a flexible spending account, or FSA, is likely the last thing you want to include on your holiday "to do" list, but letting it go can be expensive.

FSAs allow workers to set aside pretax deductions from their pay in employer-sponsored accounts that can tapped for certain unreimbursed medical and dependent care expenses.

Each year, employees who work for companies that offer such plans can designate a specific amount to deduct from their paychecks for the account. They then file claims after incurring the expenses to withdraw tax-free cash from the account.

But the tax break comes with a big caveat: If employees don't claim all of the funds for the plan year, they must forfeit the money. However, only about 2% of the funds deposited into FSAs are actually lost, according to Chris Byrd, vice president of operations and development for Evolution Benefits, an Avon, Conn.-based health care benefits payment technology company. "The perception of risk is far greater than the reality," he says.

Even so, it's time to get busy if you don't want to throw away cash.

We asked employee benefits experts how to best deplete remaining FSA funds during the year-end countdown. Here's what they said:

Find out if your FSA plan offers a grace period. If so, you may not need to hurry up and spend. In 2005, the U.S. Treasury and IRS authorized a grace period of up to 2 1/2 months to incur additional expenses for funds designated for the previous calendar year.

That means you may have until as late as March 15, 2008, to see your doctor or dentist, or buy certain over-the-counter supplies that you can apply to this year's allowance. However, not all employers offer the grace period or extend it to March 15.

Review what you already spent this year. Chances are there's a place in your home where you dump errant receipts and papers. Rummage through the pile for grocery and drugstore receipts, says Jerry Ripperger, national practice leader of consumer health for The Principal Financial Group in Des Moines, Iowa.

Over-the-counter drugs, such as Tylenol and cough medicine, qualify. So do co-pays. "People can find quite a bit of money just by going through old receipts," he says. Ripperger admits to having a repository of miscellaneous papers in his own home -- known to his family members as "the drawer."

The task may not be as onerous in 2008. Wal-Mart (WMT Quote - Cramer on WMT - Stock Picks)and Walgreens(WAG Quote - Cramer on WAG - Stock Picks) already have checkout systems that automatically calculate FSA- eligible expenses in an order, giving customers the option to pay for those items with convenience cards, such as Evolution's prepaid Benny card, which debits purchases directly from a customer's FSA account. Byrd says more merchants will adopt the technology next year.

Patient advocate Mary Shomon requested printouts of prescription histories at every pharmacy her family relied on this year. She discovered that she and her husband had more than $1,500 in unreimbursed prescription drug costs for 2007. "Many people think about new spending to max out their account," says Shomon, author of The Thyroid Hormone Breakthrough. "But [the printouts] allowed us to take advantage of our FSA maximum for 2007 without spending an additional penny."

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