I had a love/hate relationship with my FSA over this past year.
By a technicality, I'm not eligible for a health savings account as part of a high-deductible health plan. But, being a savvy health shopper, I opted for the next best thing – a flexible spending account that allows me to set aside up to $5,000 tax-free to use for health care expenses.
Here's the problem. The health care expenses I was realistically anticipating in 2011 were not eligible for my FSA distributions – things like contact solution, and the most irritatingly ineligible expense, the over-the-counter drug without a prescription. So of course by the end of the year, having a superfluous amount of FSA money, I splurged more than $500 on contacts and designer glasses before my "use it or lose it" deadline.
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There are plenty of important eligible expenses, however, that can still be reimbursed with the balance left in my 2011 FSA. For example, according to Vanguard, there are a few surprises many people would have never thought qualify for FSA distributions. These things include a weight-loss program recommended by a health care professional for a specific medical condition, such as hypertension, or a mouth guard to prevent grinding your teeth at night, if recommended by doctor or dentist.
While worthwhile eligible expenses make the FSA a smart option for reducing health costs, that forfeiture rule is often a pesky deterrent, and likely sneaks up on account holders or keeps them from putting a large amount of money into the FSA. "Over 85 percent of large employers offer FSAs but only 20-22 percent of eligible employees enroll. The principal reason for not enrolling, or for underfunding accounts is fear of the 'use-or-lose' provision," said Reps. Charles Boustany, R-La., and John Larson, D-Conn., in a statement last year after they introduced the Medical Flexible Spending Account Improvement Act.
Considering the grace period is coming to an end by March 15, advocates for repealing the use-it-or-lose-it provision are continuing to prompt legislators to move the initiative forward.
In the meantime, there are several ways you can still spend down your FSA account balance. [See 8 ways to maximize and spend down your FSA before 2012]
And in your planning for 2013, don't forget the new health reform law is imposing a $2,500 FSA cap.
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