One of the tricky issues employees need to sort out as they choose their benefits for next year is whether to put money aside in a medical flexible spending account, and if so, how much.
The accounts, commonly referred to as FSAs, let workers earmark part of their paychecks before taxes to pay for medical expenses not covered by health insurance.
Calculating how much to put away for the new year can be difficult and requires a lot of guesswork. But it's important to make your best estimate and err on the side of caution because with FSAs, if you don't use the money for a given year, you lose it.
Employers usually let workers sign up during open enrollment periods, the annual window when businesses allow employees to adjust their coverage. This often takes place in October and November for plan years that start on Jan. 1. Some businesses, school districts in particular, have different enrollment and starting dates.
Aside from FSAs for medical accounts, there also are FSAs that help pay for dependent care.
Here are some things to consider when evaluating medical FSA options:
Q: How much can I contribute?
A: The IRS sets no ceiling for this, but your employer might. A limit around $5,000 is most common, said Jodie Dietel, chief compliance officer for WageWorks, a San Mateo, Calif.-based company that helps administer more than a million FSA accounts.
Q: How can I figure out the right amount to set aside?
A: That can depend on where you live, what next year's medical needs will be, your insurance and the number of people covered under your plan.
Think about definite medical expenses on the horizon. Will your children need braces? If so, figure out what your insurance will cover and what you'll have to pay yourself.
Think about prescription drug co-payments, how many times you may refill your contact lenses or whether you or someone covered by your plan will need an expensive diagnostic test next year, such as a mammogram or colonoscopy. Look at the list of eligible expenses your company provides and consider what you would pay for out of pocket.
A family of four tends to spend about $200 annually on over-the-counter items, such as bandages and cold medicines, that can be reimbursed through an FSA, according to Kelsey Zelazny, vice president of Dallas-based Taxsaver Plan, which administers FSAs for about 300 large employers.
Remember the money will be taken from your paycheck for these accounts, so think about how that might affect your finances.
Q: What medical expenses are covered by these accounts?
A: The IRS offers a huge list of eligible items. But companies can limit the expenses they'll reimburse, so employees should check with their employers.
Crutches, reading glasses and many products purchased over the counter or without a prescription are considered eligible by the IRS. Transportation expenses for a medical visit also can be covered. That includes parking fees, a bus ticket or miles traveled in your car.
Ineligible items include vitamins, unless the patient has a prescription or doctor's letter, and cosmetic dentistry.
Q: How soon can I use that money?
A: All the money you've designated for your account will be available on the first day of the plan year. You pay back your employer with money taken out of your paycheck through the plan year.
Many plans provide debit cards for use on eligible expenses or they require employees to submit receipts for reimbursement.
Q: What happens to leftover money at the end of the year?
A: That depends to some extent on your employer. In some cases, the employee loses the leftover balance as soon as the plan year ends. But the IRS also permits a two-and-a-half month grace period after the plan year in which employees can still use their accounts. It's up to the employer to allow that.
Q: What happens if I leave my job?
A: If you leave the company before that plan year ends, you are not required to pay the amount that has yet to be taken from your paycheck.
"That's the law," said David Carver, executive director of the Washington, D.C.-based Employer's Council on Flexible Compensation, a nonprofit lobbying organization. "That doesn't mean that companies are not going to try to get the money back. They certainly will."
People who leave also cannot continue to use their FSA unless they've decided to continue on their former employer's insurance under the federal law commonly known as COBRA.
Q: Will health care reform affect next year's FSA accounts?
A: No.
Some reform measures propose FSA changes, but they wouldn't start until 2011 even if they become law.
"Many employers have already locked up their programs for next year," Carver said. "This kind of thing certainly will not impact anything in 2010."
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