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Spending Smart: A tax-free toast to your health

By Gregory Karp, Chicago Tribune –

Do you hate more money?

If you have access to a flexible spending account at work and don’t use it, perhaps you’re a more-money hater.

FSAs allow individuals and families to save hundreds of dollars per year by reaping 25 percent to 40 percent discounts on insurance deductibles, co-pays at the doctor, prescription drugs, eyeglasses, dental braces and even Band-Aids and contact lens solution at the drugstore. There are 38,000 products and services you can pay for with tax-free FSA money.

This fall, during employers’ so-called open-enrollment periods, you should give serious consideration to signing up for an FSA.

That is, unless you hate more money.

The biggest problem with FSAs is they mix the deadly dull topics of insurance and taxes, and employees don’t want to deal with it — even if they could save enough money every year to buy a new iPhone or roundtrip airfare to the Caribbean.

“It’s like giving yourself a raise,” said Jody Dietel, spokesperson for Save Smart Spend Healthy and chief compliance officer at FSA administrator WageWorks Inc. “People leave money on the table if they’re not willing to put the time into it.”

To help, here are questions and answers about FSAs.

—What is an FSA? It’s an account that you fund from your paycheck. You use the money to pay for your and your family’s out-of-pocket medical expenses, such as doctor co-payments, medical supplies, and dental and visions expenses. The key is that money going into the account isn’t taxed. So, when you spend it, you’re spending tax-free money, essentially getting a discount on everything from root canals to contact lenses.

—How much can I save? If you normally spend $1,500 per year on out of pocket on medical, dental and vision products and services — that’s about the average an FSA participant pledges to the account — an FSA allows you instead to spend about $1,050, assuming your tax rate is about 30 percent. That’s a savings of $450 that would have gone to taxes and instead is paying your bills. Experts say savings range from 25 percent to 40 percent, with those in a higher tax bracket saving more. The money is sheltered from federal, state and Social Security taxes.

—How does it work? You designate a yearly amount to contribute to the FSA. Your employer deducts a prorated amount before taxes from paychecks all year long and deposits the money into the FSA. Whenever you pay for an approved medical item, you draw down on the money in that account. You must sign up again for an FSA each year.

—If FSAs are great, why do so few employees use them? FSAs, which have been around since 1978, have one big, hairy drawback, the draconian “use it or lose it” rule. If by the end of the plan year you don’t use all the money in the FSA account, you lose it. Actually, your employer keeps it.

“That’s the No. 1 reason people are nervous about participating in a healthcare flexible spending account,” said Karen Frost, vice president of product strategy and development at Aon Hewitt, an FSA administrator.

But “use it or lose it” is not as scary as it sounds if you spend even minimal effort setting up and using your FSA. Most plans allow you until March 15 of the following year to use up the money, essentially giving you 14.5 months to deplete your account.

—How much should I contribute? The main fear with “use it or lose it” is pledging more money to the account than you’ll use. To gauge your contribution, base your FSA contribution on your out-of-pocket expenses from the previous year.

“Your health care expenses are more predictable than you think,” Frost said.

You can go through your records from the previous year, whether from charge account statements, a checkbook or money-management software, if you use it. Some health plans give you online access to your previous year’s expenses, including your out-of-pocket costs, and offer online calculators to help you decide how much to contribute.

“With a little planning, FSAs are a huge tool to stretch those paycheck dollars,” Dietel said. Keep in mind that even if you forfeit some money at the end of the year, you can still come out ahead because you’ve saved so much by avoiding taxes.

If you’re still wary, one strategy would be to pledge just $500 to an FSA account to try it for 2013. Even healthy, single people should easily be able to use $500, experts say.

—Is an FSA difficult to use? Not anymore. You used to have to keep track of receipts and fill out reimbursement paperwork. Now, most plans issue you an FSA debit card with a charge card logo, such as Visa or MasterCard. So you can use it where credit cards are accepted, including many doctor’s offices. “The pain and agony of saving your receipts and pill bottles in a shoe box is gone,” Dietel said.

—What’s new for 2013? FSA news for 2013 is both good and bad. The bad news is that one of the provisions of the health care overhaul was to limit FSAs to $2,500 per year, starting in 2013. Many employers allowed squirreling away a maximum of about $4,000 or $5,000. Even so, the average amount pledged to an FSA account is about $1,400 or $1,500, depending on estimates. That’s far less than the lowered cap. So, the change is unlikely to have a huge effect.

“It’s still a significant benefit that people could be capitalizing on,” said Andre Demetrius, southeast health and productivity practice leader for Buck Consultants, a human resources consultant.

The good news is the Internal Revenue Service is considering changing the “use it or lose it” rule, possibly allowing account holders to roll over all or some of the money to the following year. The IRS opened the question for public comments but made no ruling as of late September.

—What can I spend the money on? You can use FSA money for health care expenses for you and your family. Typical items are out-of-pocket costs for insurance deductibles and co-pays for doctor and hospital visits, prescription drugs, and dental and vision services and products.

More unusual items are LASIK eye surgery, crutches, acupuncture, and smoking cessation and weight-loss classes.

Additional information is available from your FSA administrator. WageWorks offers a list of approved items at

—What about over-the-counter medications? In 2003, the IRS allowed FSA money to pay for over-the-counter drugs, such as aspirin, cough medicine and allergy medication. But then beginning in 2011, over-the-counter medications came off the list of FSA-eligible products. However, there’s a work-around. You can ask your doctor to write a prescription for over-the-counter meds. With the prescription, they qualify.

—How can I afford to have more money taken from my paycheck? The question hints at a basic misunderstanding. The vast majority of people are going to spend some money on medical, dental and vision anyway. You may as well buy those products and services with tax-free money, which is essentially a huge discount.

“Some low-income people just don’t see the value in it because they think it’s about every dollar they take home, not realizing that anything you can do on a pre-tax basis benefits them,” Demetrius said.

—What if I leave my job during the year? This is another great part about FSAs. You can use up all your pledged money before it’s taken from your paycheck. If you pledged $1,000 to the FSA, you could spent $1,000 on Jan. 2 at the dentist before you contribute anything. If you leave your job or get laid off and have depleted your FSA, you don’t have to pay it back. (Your company gets stuck for the difference.) That’s why it might be a good idea to use FSA money early in the year, if you can.

—What if my medical plan is an HSA? Some companies offer a health savings account, which works similarly to an FSA but in conjunction with a high-deductible medical plan. Generally, if a company offers an HSA and FSA, the FSA will be limited to paying for dental and vision expenses, not medical.

—Are there other kinds of FSAs? Yes. Many of the same arguments for health care FSAs can be made for dependent care FSAs if you spend money on child care. You essentially pay the daycare center or other traditional daycare provider with pretax dollars. But, unlike the health care FSA, you can only spend the money after it’s deposited in your account.

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