Drain Your Flexible Spending Account While You Can

Now is the time to sort through receipts and make last-minute health care purchases.
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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) - Get Report

and

Walgreens

(WAG)

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."

Employees also frequently overlook co-pays for the past year's medical visits, says Jason Goodroe, a benefits administration executive for Columbus, Ga.-based Aflac. "Ten dollars here and twenty there can quickly add into the hundreds," he says.

Spend the balance.

If your FSA plan doesn't offer a grace period and you don't meet the maximum after reviewing your 2007 expenses, you'll need to incur expenses for the remaining funds by year-end, although you generally don't need to file the claims until springtime. (Check with your plan.)

Prescription eyewear, including the sunglasses you may have always wanted, and contact lenses are considered qualified expenses. Non-cosmetic dental treatments and orthodontia are also eligible. So are over-the-counter-drugs that are necessary for the treatment of a condition, such as influenza or sinusitis.

Tom Billet, a health-benefits consultant in the Stamford, Conn., office of Watson Wyatt, a global human-capital consulting firm in Arlington, Va., suggests refilling maintenance drugs by using a mail-order pharmacy, through which you can usually obtain -- and pay for -- a three-month supply. Preventive care, such as a blood pressure or cholesterol screening, also qualifies.

Or peruse the FSA section of

Drugstore.com for a broad selection of FSA-eligible items, including

Pfizer's

(PFE) - Get Report

Sudafed, NicoDerm CQ by

GlaxoSmithKline

(GSK) - Get Report

and contraception. You'll also find high-tech gadgets among the entries, such as a home defibrillator by Phillips Electronics, hearing aids and blood-pressure monitors.

Billet cautions against stockpiling though. The IRS hasn't delineated limits for FSA-eligible purchases. But Byrd of Evolution Benefits says the amounts you buy should pass a reasonable person's "smell test."

And don't forget to plan for next year. Lasik eye surgery is an FSA-eligible benefit that many employees pounce on, Byrd says. Given the nearly $3,000 price tag, it's less likely you'll be worried about depleting your funds in 2008.

Suzanne Barlyn is a writer in Washington Crossing, Pa.