Flexible Spending Accounts About to Get Less Flexible

lady looks at a bottle of pills -flexible spending accountsFlexible Spending Accounts, which allow you to use pre-tax dollars to pay for dental and medical expenses that aren't covered by insurance, have long been favored by budget conscious consumers. That's because money that goes into these accounts escapes income, Social Security and Medicare taxes, reducing your overall costs for your eligible expenses by about 20%, according to estimates from consulting firm, Mercer Health and Benefits.

But these accounts, known for their extremely generous list of eligible expenses and utilized by one in three employees, are about to get a lot less flexible in 2011. With new restrictions, designed to raise additional tax revenue to offset the costs of the health care reform bill, going into effect on January 1, here's what you need to do.Load Up on Over-the-Counter Medications Now
While you'll still be able to use FSA's to pay for deductibles, co-pays, orthodontia and eyeglasses in the new year, some 15,000 over-the-counter medications -- with the exception of insulin -- will not be covered by FSA's without a physician's prescription. An official list of these medications (as well as ointments and creams) is expected to be released by the IRS today; click here for a tentative list.

Prepare to Jump Through Hoops
Even though getting a prescription for basic cabinet staples like Advil, Tylenol, Claritin, and Robitussin defeats the point of "over-the-counter," if you want to pay for these things with tax-free dollars, there's no way around it. And unfortunately, while some doctors will readily write these prescriptions, others may levy a surcharge for doing so, and some will even require a patient visit. That means you'll have to budget more for co-pays.

Calculate Your Costs
As it stands now, the average FSA participant who forfeited funds left $43 unspent, according to Mercer. That's not much, but it is up 54% from the year before, and that number will likely rise in 2011, particularly if you've been using the funds primarily for last minute OTC drugstore buys.

Kiss Your FSA Debit Card Goodbye
While you'll still be able to use your FSA debit card for non-medicine purchases covered by your plan, the convenience of using it for your over-the-counter drug purchases is going away -- unless you use a drugstore that derives at least 90% of its gross revenue from medicine purchases. Otherwise, you'll be required to shell out after-tax dollars from your wallet to cover your purchase. You'll then have to submit the receipt, along with a copy of your prescription, for reimbursement. A nuisance if you currently use a discounter like Costco, Walmart or Target, for example, as your pharmacy.

Plan Ahead
Thinking about getting Lasik surgery? Need braces? If you're considering a big elective medical or dental procedure, this is something you'll want to do sooner rather than later. Why? New, lower annual contribution limits -- of $2,500 -- are coming in 2013.
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