By FPA member Eric S. Toya, CFP®
Last Updated: January 3, 2011
Flexible Spending Arrangements (FSA) are an employer-provided benefit that allows employees to set aside a portion of earnings to pay for qualified medical expenses. Money deducted for a FSA (or what are also called Flexible Spending Accounts or FSAs) is not subject to payroll taxes or federal income taxes. This provides substantial savings on qualified medical expenses. The biggest downside to a FSA is the “use-it-or-lose-it” nature of the plan. Any amount remaining in the account at the end of the year cannot be carried over to the next year, and is forfeited.
Qualified expenses include medical and dental expenses that would generally qualify for a medical expense income tax deduction. This is a broad list that includes (among many other items) contact lenses, most dental procedures, eye surgery (including laser), deductibles and most medication. Through the end of 2010, this included over-the-counter (OTC) medicines. This resulted in the end-of-year drug store scramble. Participants with money left over near the end of the year would head to their local drug store and load up on aspirin and contact lens solution.
Starting in 2011, OTC medicine and health-care products only qualify with a prescription from a doctor. This includes ordinary products such as cough syrup, pain relievers, cold medicine and even sunscreen with SPF 30 or greater.
So what should you do?
Plan your contribution amount carefully. Take an assessment of your annual medical expenses, adjusting for any unusual large recent expenses. Factor in any elective or planned expenses such as dental work, lasik surgery or family planning. Be sure to contribute an amount that you are certain to use. The end-of-year scramble to use up the remaining funds is much more difficult with the new restriction on OTC medication.
When you go for your annual physical check-up or any other visit, ask your doctor to write a prescription for OTC medicines that you will be buying anyway. This is obviously at your doctor’s discretion, but it doesn’t hurt to ask.
FPA member Eric S. Toya, CFP®, is Vice President of Wealth Management for Trovena, LLC in Redondo Beach, Calif. Eric is a current member of the FPA Los Angeles Chapter Board of Directors.