Thursday, October 29, 2015

Flex Spending Accounts Again

It is that time of year again when companies hold their annual open enrollment. This is when employees have the opportunity to change medical or dental plans, and to opt into making contributions to a flexible spending account (FSA). In general, a flexible spending account allows one to deposit pre-tax dollars into the account to pay for medical expenses, or to pay for dependent care. (Note that these are two different types of accounts.) The ability to use pre-tax money to pay for expenses is a good benefit that can save you money.

One thing to keep in mind when contributing to an FSA is that most flex spending accounts operate on a "use it or lose it" basis. This means that any balance you have in the account at the end of the calendar year is forfeited to your employer.

However, some employers offer either a grace period, or allow funds to be rolled over to the following year.

  • Under the grace period rule, a FSA plan can permit an employee to use amounts remaining from the previous year to pay expenses incurred for certain qualified benefits during the period of up to two and a half months into the following plan year.
  • Or an FSA can allow up to $500 of unused amounts remaining at the end of a plan year in a health FSA to be used toward qualified medical expenses incurred during the following plan year (rollover), provided that the plan does not also incorporate the grace period rule.

Having said this, it is the choice of the employer (NOT the employee) to offer either of these options. This is something that it pays to ask your employer about.

Remember that if you have a balance in your FSA when you leave your company, the "use it or lose it" provision generally applies. This is true even if you are terminated without cause (i.e., laid off). Any money that you have left in your FSA plan when you are terminated will be kept by your former employer. This may seem totally unfair, but that has been my real life experience.