The FSA annual grace period (AGP)

But in 2005, the IRS offered a 2 ½ month grace period (known as the “annual grace period” (AGP)) that employers, if they chose to do so, can use in their plans.  So, it’s important to know if your employer has decided to use the 2 ½ month grace period, you still have time to use your 2009 health care savings.

Don’t rely on the FSA grace period

While the grace period can be a great benefit, it’s important that you don’t become reliant on the grace period and begin to see it as the actual due date for spending.  This could cause problems when trying to use up all of the current year’s balance by the end of the year.  In other words, if you rely on this year’s grace period to spend last year’s savings, you now have less time in the year to spend current year savings and may end up needing to use the grace period again (using it as the actual due date).

At the same time, the grace period has been provided as a nice benefit to the FSA’s.  Sometimes it is difficult to use up all of the funds by the end of the year.  A “use it, or lose it” strategy can be somewhat harsh, especially if you’ve contributed a lot of money to your FSA.  Perhaps you over contributed in one year.  The grace period simply offers you some extra time to spend your FSA balance.

The FSA run-out date

You need to also keep in mind another important date associated with the FSA.  It is called the “Run-Out date.”  It is a date that marks the cut off for filing claims for the previous year.  In other words, all claims have to be submitted by the run-out date.  If you do not submit a claim before the run-out date, you will forfeit any remaining balance in the account.

Check to see if your employer offers the FSA grace period

• Check to see if your employer offers the annual grace period by either contacting your HR department or checking on the website of your company’s plan administrator.
• Check to see what types of accounts are offered as a part of the grace period.  Some employers may limit the plan types.
• Fill free to call or go and visit with your HR department to understand the specific rules your employer has put into place.  While checking benefits online is a convenient option, you don’t want to misinterpret any rules.  Again, the idea is for you to avoid losing any money!

Friendly reminders for general FSA tracking

Make sure you keep all of your receipts

There are several times throughout the year I’m asked to submit a receipt to substantiate the purchase.  I typically keep a separate folder in my financial file for such expenses.

Respond promptly for any requests to substantiate spending

When asked to substantiate a purchase, make sure you do so right away.  Without prompt substantiation some accounts can be frozen.

File claims promptly

How will you pay for medical expenses if you use an FSA?  With an FSA the money is taken from your paycheck as a before tax benefit.  So, how do you purchase or pay for medical expenses if your employer doesn’t offer an FSA card to withdraw from this account?

To be honest, it’s difficult for most people to use cash out of their monthly budget to pay in advance for the expense before it can be reimbursed.  Therefore, many people may use a credit card and then file a claim.  Once the payment is received the balance on the credit card is paid.  In this case it is important to promptly file claims for reimbursement because in some cases it could take a few weeks to receive your check.

Review both your current year and previous years’ accounts

It’s important to review balances and transactions for both current year and previous year if you’re in-between.  As the new year begins, any spending will typically come from your previous year if you have a balance.  Once the balance is used, spending will withdraw from your current year account.

It’s a good idea to keep an eye on spending, especially if it falls in the grace period.  You’ll also want to make sure you’re submitting claims promptly.

Final thoughts

The best way to use an FSA account is with some good estimating of expenses.  You really don’t have to be concerned with the grace period or run-out date if you’ve estimated accurately.  You can only provide accurate estimates if you’re tracking actual health care costs and staying aware of what expenses might be on the horizon.  But keep in mind, it’s and estimate so it’s not perfect.  The ideal situation is to either run out of funds right at the end of the year (a little bit early), or be in a situation to use up your funds within a 1 month grace period.

What do you think about the annual grace period and run-out date offered by some employers?

With less than one week left in the year it’s important you don’t lose any of your balance.  I recently logged onto my account online to check the balance.  Fortunately, we’re not in a situation to have to do any last minute spending, but its okay if you do need to empty your account because there are some options.

2 Things to do before you spend the FSA balance

First, check with your employer as certain plans may offer a grace period for up to 2 ½ months (according the IRS) after the end of the plan year.  If there is a grace period any expenses within the period can be paid using the balance in the plan.

Second, make sure you’ve submitted all of your expenses for reimbursement.  I recommend checking the IRS eligible expenses list and determine if you’ve incurred any medical expenses on the list that have yet to be claimed.  If so, make sure you still have the receipts and promptly submit your claims.

Eligible expense ideas

Here are a few last minute ideas if you determine you still need to use up your balance.  Please double check the eligible medical expense list on the IRS website for more details and determine what is right for your situation.

Transportation expenses

Transportation expenses of a parent who must go with a child who needs medical care.  I thought this one may be an interesting option to explore.  If you’re like our family there have been a lot of trips taking our children to the doctor this year for various check-ups and when they’ve been sick.  The IRS guidelines are specific, so make sure your situation applies.

Bandages or other over the counter medical supplies

I think this is typically the most popular idea for burning an FSA balance.  Making a trip to a Sam’s club or Super Wal-Mart may be good places to stock up on such medical supplies.

Fees you pay to a Chiropractor for medical care

I think it’s typically easy to make an appointment if you do receive care from a Chiropractor.  Although, the co-pay may be about the only thing you can deduct here.  Also, seeing your dentist is another idea that fits in this category if you’re due for a check-up.

Contact lenses and the materials required for using them are eligible

This is another option to consider if you haven’t seen an eye doctor yet this year.  Eyeglasses are also an expense that would fall into this area.  I know that I could get an appointment fairly easy with a local doctor, if needed, and probably place an order before the end of the year.

Place an order for routine prescriptions

Finally, if you use routine prescriptions and are almost out of stock, it may be a good time to place an order.

Keep in mind, according to the IRS you cannot receive distributions from your FSA for the following expenses:

• Amounts paid for health insurance premiums.
• Amounts paid for long-term care coverage or expenses.
• Amounts that are covered under another health plan.

Do you have any other ideas for emptying your healthcare FSA?

This article is not meant to be an exhaustive overview of the health care flexible spending account, but is meant to offer some of the highlights based on personal experience and provide some reliable references for more information.  Please note that I’m not a tax professional, so I’m not going to attempt to help you determine if the use of the plan makes sense to you from a tax standpoint.  Please seek guidance from a professional in this area.

What is the health care FSA?

A health care FSA allows employees to be reimbursed for medical expenses.  You elect an amount to be voluntarily withheld from your paycheck before taxes through a salary reduction agreement.   This amount is divided by the number of pay periods in the year which is the amount deducted from your paycheck each payday.  The IRS also allows employers to contribute to the plan.

Health care FSA eligible expenses

The general eligible expenses are for health care deductibles, co-payments and coinsurances as a part of your health plan.  It may also include other dental and vision expenses and over the counter medications.  You cannot receive reimbursement for amounts paid for health insurance premiums, long-term care coverage or expenses, and amounts covered under another health care plan.  If you would like more information on the IRS approved deductions click here.

Advantages of a health care FSA

It increases our spendable income each month

Probably the biggest advantage of a health care FSA is the deductions are taken out of my paycheck before taxes.  Therefore, we decrease our taxable income by the amount deducted each pay period.

We have peace of mind

Once the plan begins for the year we can begin submitting expenses to be reimbursed.  We can actually deduct more expenses than what we’ve elected to be withheld for the pay period as long as we don’t go over the amount we elected for the year.  Since our family has planned ahead the amount to be withheld, we have great peace of mind in that we can go purchase over the counter medication or pay for a copay without having to figure out where to find the money for these expenses.

FSA debit card

Some plans are now offering an FSA debit card.  This is a huge added convenience because we can use the card just like we would our checking account debit card.  Most doctor’s offices or larger retail stores such as Target will accept it.  Before having the debit card option, we had to submit every receipt for reimbursement.  Now, we use the card and keep our receipts in case our plan requests more detail about an expense.

Considerations before enrolling in a health care FSA

Use it or lose it plan

Probably the biggest consideration in planning is the FSA is a use it or lose it plan.  At the end of the benefit year, the remaining balance cannot be carried over into the next year.  However, the IRS says that an employer can allow up to a 2 1/2 month grace period to use up the remaining balance.  Given the use it or lose it consideration, it’s critical we estimate well our medical expenses for the year.

We typically take a best guess at the number of doctor’s visits for normal check up and the associated copays.  Of course, we can’t predict every medical expense, but there are sometimes planned procedures we can account for in our estimates.

I will mention we have come up short in our estimate in the past because of unexpected medical expenses.  This required us to make adjustments in our budget for health care savings each month on top of the pre-tax contribution.  Remember, the pre-tax contribution doesn’t stop until the end of the year.  In this case, we had enough health expenses that used all of the monies in the FSA before the year ended.

Limited changes allowed

We can change or revoke our election only if there is a change in your employment or family status that is specified in the plan.  Therefore, if we notice mid-point through the year we may have elected to contribute too much, we can’t make a change unless we meet these criteria.

Submitting receipts

Experience has show that we have to be organized in our use of our health care FSA.  Some of our purchases do require we submit a receipt with more information about our purchase.   Every time we use the FSA debit card, we keep the receipts and store them in an FSA envelope of our financial file.  If I receive an email or notice requiring more proof around the purchase, I find the receipt, fill out a form required by my benefits department and fax both the form and receipt for review.  Note:  I’ve never had an expense denied after showing the required information.

Getting started

I recommend starting by estimating your medical expenses for the next year.  The best way to do this is to review receipts or statements from the current or previous year.  If you don’t have this information, you have to take your best guess at the total number of routine doctor appointments, over the counter medical supplies or medicine you’ll need as well as any scheduled procedures.  Once you have the total, you can use this FSA contribution planning worksheet to determine your potential savings.

What experiences have you had (positive or negative) with the health care flexible spending account?

References

• Internal Revenue Service, Publication 969
• Internal Revenue Service, Publication 502
• Automated Data Processing (ADP) Health Care FSA Overview
• Wikipedia: Flexible Spending Account