If you have money set aside in a Flexible Spending Account (FSA), you know it’s a great tax saving vehicle. Not only are your FSA contributions not taxed, but you don’t have to wait until you have enough money in the account for a planned medical expense, such as braces for your kids.
FSAs have a “use it or lose it” provision, although the IRS has lightened up considerably on this rule.
Years ago, every penny of your FSA had to be spent by the last day of the plan year or it was forfeited. Now, if your employer amends its plan, participants can get an extra 2 and 1/2 month grace period to spend the funds. So assuming the plan operates on a calendar year basis, the new deadline would be March 15 of the following year if your employer plan allows it.
The “use it or lose it” rule still exists, but this extension softens the blow, making it easier to get the maximum benefit from an FSA.
Important: In order for this extension to apply, employers must amend their FSA plans by December 31st. Don’t assume you have the extra months until you’ve checked with your benefits department to verify that an amendment has been adopted.
You might want to use unspent contributions for a spare pair of eyeglasses or prescription sunglasses. If you’re due for a dental checkup, why not move it up?
Before the new year starts (assuming that your FSA is administered on a calendar-year basis) you’ll need to estimate how much of your paycheck to set aside for next year. Contribute enough for all the expenses you expect, such as co-pays for annual doctor visits, ongoing prescriptions, and replacement eyeglasses. Pay attention to your account balance and make sure it is spent by the end of the plan year — plus the extension, if it is adopted by your employer — so you don’t forfeit any of your FSA funds.
Looking for additional ways to reduce your tax bill? Reach out to your trusted Pugh CPAs Advisor. firstname.lastname@example.org