My Personal Finance Journey

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Flexible Spending Account Gets More Flexibility

Contributed by mm | May 24, 2005 10:29 AM PST

For many people in high tax brackets, Flexible Spending Account (FSA) is probably the greatest tool to get tax relief on healthcare and dependent care expenses. Having signed up for $5,000 for dependent care FSA and $1,400 for healthcare FSA this year, I look forward to shaving more than $1,000 off my tax bill, not to mention the benefit of more liquidity.

One drawback of FSA is its use-it-or-lose-it rule, which means if you cannot spend all the money you contribute to the account by December 31, you will lose it.

If you are afraid of losing your hard-earned money, Treasury and IRS just gave you one more reason to sign up an FSA in the next enrollment cycle. As announced in a joint press release last week, employers now have the option to extend the reimbursement deadline from 12 months to 14 1/2 months. This means, instead of losing all your remaining balance in FSA by December 31, you can have until March 15 to use your funds.

Good work! It is fair for our politicians to consider this as a victory. As boasted in the same press release:

"Putting people back in charge of their own care is one of the most important things we can do to strengthen our health care system. That's why President Bush has made it a priority to make it easier to access and pay for care through FSAs and to encourage consumer driven health care initiatives such as Health Savings Accounts."

(P.S. It seems that employers have the option to extend to 14.5 months or keep the original 12 months term. Let's hope our employers will still be able to respond to this employee-friendly option. After all, the next benefit enrollment season is still half a year away.)

This Post Has Received 2 Comments. Share Your Opinions Too.


nickel Commented on May 24, 2005

I've never completely understood the use it or lose it rule. Don't get me wrong... I understand the desire to not let people accrue endless amounts of money in their account year after year, but... Why not simply reduce the next year's contribution limit by the amount that you carry over? This year I maxed my medical account -- $3600 in contributions. What would seem fair to me would then be to reduce next years limit from $3600 to ($3600 - whatever is left at the end of the year). So if I don't spend anything, I can't get the money out, and I can't put any more in, but it's still there to be spent next year.

I realize that this might create some headaches with receipts not being due until sometime in the next year, but this is far from impossible to implement.

By the way, who gets the unspent money? Does the employer/plan administrator keep it? Or does it revert to the IRS?
--
http://www.fivecentnickel.com/


beyondo Commented on December 5, 2005

I agree with nickle, great way to keep from having to throw the dice every year. I would alos like to know who gets the money?


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