Deadline Looms for Flexible Spending Accounts

A deadline is fast approaching for some owners of flexible-spending accounts.

March 15 is the last day to take advantage of money they set aside in 2007 in these accounts, known as FSAs.

If they miss that deadline, they will forfeit the funds.

FSAs are a popular employee benefit. Workers can put money via paycheck deductions into the accounts, typically for medical or childcare costs, to pay costs not covered by insurance.

Even better, the salary contributions are made before taxes -- federal income tax, Social Security and most state levies -- are calculated, thereby reducing taxable income while simultaneously setting aside untaxed money to pay eventual out-of-pocket expenses.

FSAs, however, do have a down side. If you do not spend all the account money, you lose it.

The Internal Revenue Service eased that burden somewhat in 2005 when it allowed companies to give workers a 2½ month grace period to spend down their prior-year contributions. For benefit plans that operate on a calendar basis, that final deadline is March 15.

"It's very worthwhile for people to save on a pretax basis," says Michael P. O'Toole, senior director of Publications & Government Relations for the American Payroll Association. But, notes O'Toole, some people are still hesitant about contributing to an FSA because of the use-or-lose provision.

Careful estimation of FSA expenditures is one way to overcome that fear. Your spending history the previous year can be a good benchmark, says O'Toole, as long as you take into account whether those expenditures were ordinary or reflected some unusual costs. The rule of thumb is to be conservative in determining your FSA contributions.

And, of course, the 2½-month grace period, which saves employees from having to shoehorn medical procedures into the busy holiday season, also eases many workers' concerns.

If you have an FSA and ended last year with money in the account, here's a game plan for getting the most out of the account before it's too late.

First, make sure that your company offers the grace period. While the IRS allows the extra time, it does not require companies to offer it. Not all do. Check with your payroll, benefits or human resources office to confirm your FSA deadline.

Next, find out exactly how much 2007 money you have left in your account. In most cases, it is medical FSAs, not dependent care accounts, that have unused funds. The reason: Federal law limits dependent care FSA contributions to $5,000 a year per household, an amount that is usually exceeded well before the end of the benefit period.

OK. You have FSA medical money. You now have a few days to schedule any FSA-allowable procedures. These could include an annual checkup not covered by your insurance, a vision exam and any glasses or contacts that are prescribed, chiropractor treatments, acupuncture sessions, even some weight loss programs, as long as your physician certifies that it is medically necessary.

The medical reason behind any cost is key. Also, employer plans have some discretion in what is or is not FSA reimbursable, so check with your benefits specialist beforehand to ensure you aren't stuck paying the full cost of a treatment you scheduled specifically to use up your account excess.

One easy way to spend down an FSA is to stock up on over-the-counter medicines. Again, most FSA administrators provide lists, either paper or online, of OTC products for which you can get FSA reimbursement.

Just be sure to complete all your eligible purchases and treatments by March 15. Then you can start drawing down your 2008 FSA contributions.