Using a Flexible Spending Account

Flexible spending accounts (FSAs) are unique financial accounts that allow you to set aside a portion of your pre-tax income in order to pay for future medical expenses. As a result of those unique characteristics, flexible spending accounts (FSAs) offer two potentially attractive benefits: the ability to lower your current income taxes, and the ability to pre-plan for the financial ramifications of costly medical bills.But flexible spending accounts (FSAs) also present a potentially significant financial risk: You must spend all of the money in your account each year, or else forfeit ownership of that money. Federal rules do provide some flexibility, however. Funds in flexible spending accounts (FSAs) do not need to be depleted by December 31 each year. Instead, the government allows you to make eligible purchases during the first 75 days of the year following the year in which you will claim the expenses. In other words, if you still have $500 in flexible spending accounts (FSAs) on December 31, 2008, you have until mid-March to spend the money. After the 75-day grace period, any assets remaining in your flexible spending account (FSA) will be forfeited.
Decisions, Decisions
Flexible spending accounts (FSAs) come in three different varieties:

• Dependent Care Flexible Spending Accounts (DCFSAs) allow you to set aside money to pay for the care of an eligible dependent. The maximum annual contribution to a DCFSA is $5,000 per household. DCFSAs are designed to be used on behalf of a dependent child who is not yet 13 years old. DCFSAs can also be opened for any individual whom you claim as dependent on your tax return because he or she is mentally or physically unable to provide self-care.
• Health Care Flexible Spending Accounts (HCFSAs) help you pay for care not covered by specific federal employee benefits programs. Eligible expenses are those you incur for yourself, your spouse, or your dependents. The maximum annual contribution limit for HCFSAs is $5,000 per taxpayer (not per household).
• Limited Expense Health Care Flexible Spending Accounts (LEX HCFSAs) are for workers who participate in a Health Savings Account (HSA). IRS rules prevent HSA participants from simultaneously participating in a DCFSA or HCFSA. However, a LEX HCFSA can be used only for dental and vision expenses.

What You Can-and Can't-Pay for With FSAs
Flexible spending accounts (FSAs) can be used to pay for a variety of different expenses, ranging from basic supplies such as aspirin and bandages to major treatments such as surgery and extended hospital care. Other eligible flexible spending account (FSA) expenses include day care costs, late pick-up fees, after-school care costs, adult day care expenses, and fees paid to housekeepers and/or au pairs who look after a dependent.
Note, however, that you cannot use money from a flexible spending account (FSA) to pay for services provided by one of your own dependents. For example, you can not use money from a flexible spending account (FSA) to pay your daughter to be your elderly mother's caregiver. In addition, you must prove that any expenses you pay with flexible spending account (FSA) money are medically necessary. That typically requires you to provide a letter from your care provider outlining details of the dependent's unique health-care requirements.
The list of expenses ineligible for reimbursement from a flexible spending account (FSA) includes: most cosmetic treatments, expenses claimed on your tax return, expenses paid by a third party (such as an insurance company), hair transplants, insurance premiums, weight loss programs, physician retainer fees, and most fitness programs.
Using a flexible spending account (FSA) is a five-step process. It involves figuring out how much you should contribute, enrolling, incurring expenses, filing your claim, and receiving your reimbursement.
To help you determine your annual flexible spending account (FSA) contribution, the federal government provides a free "Savings Calculator" at www.FSAFEDS.gov. By taking advantage of this convenient tool, you can reduce the risk of contributing too much to your FSA. (As noted earlier, any unspent money remaining in your account will eventually be forfeited.)
The enrollment season for flexible spending accounts (FSAs) typically begins in early November and ends in early December. For example, in 2007 you could enroll in flexible spending accounts (FSAs) from November 12 through December 10. Also remember that you must re-enroll in a flexible spending account (FSA) each year-your enrollment does not automatically continue from year to year.