25 Ways to Spend Your Flex Account

Scrambling to spend the last of your flexible spending account? Here are some suggestions. Plus, calculate your tax benefit break-even point and how much to contribute next year.

By Kimberly Lankford, Contributing Editor, Kiplinger's Personal Finance

December 1, 2005

If you've been healthy this year, congratulations. But if you've spent less on medical expenses than you expected when you set up your flexible spending account, you may be scrambling to find ways to use the money before it disappears.

Many companies let employees set aside $2,000 to $3,000 annually in pre-tax money to spend tax-free on medical expenses. It's a great deal, but the big catch is that you lose what you don't use by the end of the plan year.

The good news is that the U.S. Treasury Department issued a notice allowing employers to extend the flexible-spending account deadline for up to ten weeks. So employers now can give employees until mid-March rather than December 31 to clean out their accounts thanks to a change in the rules.

But even though employers are now allowed to make this change, they aren't required to do so -- and a surprisingly large number have decided to keep their use-it-or-lose-it deadline on New Year's Eve. Only about half the employers surveyed by the Deloitte Center for Health Solutions, a consulting firm, planned to extend their deadline for using FSA health-care money, and only about one-third planned to extend the deadline for both health-care and dependent-care FSAs.

So before you rush out and spend your FSA money, first ask your employer about your company's deadline.

Whether your deadline is in December or March or any time in between, there are plenty of places you can spend the money -- much more than there had been in the past. If you start considering your options now, you should have plenty of time to make the necessary appointments and purchase the items and procedures you really need.

Where to spend your flex funds

You can use the flexible spending account money for almost any health-related expense that isn't covered by insurance, including:

1. Deductibles and co-payments
2. Dental work
3. Orthodontia
4. Eyeglasses
5. Contact lenses
6. Prescription sunglasses
7. Laser eye surgery
8. Psychotherapy, psychiatry, psychology
9. Drug and alcohol treatment
10. Smoking cessation programs and prescriptions
11. Medically necessary cosmetic surgery
12. Massage therapy to treat an injury
13. Physical therapy
14. Speech therapy
15. Out-of-pocket expenses for fertility treatments
16. Chiropractic care
17. Doctor-recommended weight-loss programs
18. Hearing aids and batteries
19. Medical equipment, such as wheelchairs, crutches or oxygen equipment
20. Assistance for the disabled, including guides, Braille books, seeing-eye or hearing-trained animals, note takers, etc.
21. Birth control pills, devices and procedures
22. Acupuncture or related procedures to treat a medical condition
23. Medically necessary prescriptions
24. Vaccinations
25. And now you can also use flex funds for medications that don't require a prescription, such as allergy and cold medications, antacids and pain relievers.

You can make appointments and purchases until the last day of your plan year. Most plans give you a grace period to submit claims for the previous year. Check with your plan administrator or human resources department for details and specifics on deadlines and claims processing.

You can still come out ahead

And while your goal should be to spend every nickel, don't feel too bad if you have to surrender some flex money. You might still come out ahead.

That's because the money you contribute lowers your taxable income, which ends up lowering your tax bill. For example, say your taxable income (income after deductions and exemptions) is $100,000. You decided to set aside $3,000 in your flex plan, but were only able to spend $2,500. You lost $500 right? Wrong.

You've actually saved $485. How? Because you left the IRS less money to tax. That $3,000 contribution lowered your taxable income to $97,000. If you pay 33% in federal, state and social security taxes, you only have to spend $2,015 of your flex money to break even. Because you've spent $2,500, you are actually ahead by $485.

Estimate your flexible spending account break-even point and see how much you're saving, or how much more you need to spend.

Take advantage of next year's contribution

And don't let sacrificing some flex plan money this year turn you off from making the most of your flexible-spending account next year.

Now is the time that many employees have to consider their health benefits options. And many employers are increasing their employees' share of the bill for health insurance co-payments, deductibles and out-of-pocket costs for prescription drugs -- all of which can be paid with pre-tax money from your flexible spending account.

Your employer may also offer a dependent-care flexible spending account, which lets you set aside up to $5,000 in pre-tax money for child-care expenses.

Lowering your taxable income by contributing to flexible spending accounts can also help you qualify for other tax breaks if you're close to the income limits -- helping you qualify for Roth IRAs, education, dependent child, and other tax credits.

Estimate out how much money to contribute to each type of account next year.

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