Contributed by: Nick Defenthaler, CFP®
With less than a month left in 2015, now is a good time to evaluate your Flex Savings Account (FSA) balance to see if there are any funds remaining from the year. An FSA is an account that you, as an employee, contribute to on a pre-tax basis – like a traditional 401k. You can then use the contributions for medical or dependent care expenses, allowing you and your family to pay for these inevitable expenses in a tax-efficient manner. The catch however, is that funds contributed to the FSA typically must be used by the end of the year or the money is forfeited.
Flex Plans Get More Flexible
As mentioned, FSAs are "use it or lose it plans" but in recent years, the rules have become slightly more flexible - no pun intended. Employers now have the option to either:
- Provide a “grace period” of up to 2 ½ extra months to use the remaining funds in the FSA or…
- Allow you to carry over up to $500 to use in the following year
It’s important to note that your employer is NOT required to offer these options, but if they do, they are only permitted to choose one of the above options – not both. This recent change to how the unused balances for FSAs are treated helps you and makes FSAs far more attractive than years past.
How to Make the Most of Your Flex Spending Account
The most you can contribute to an FSA for 2016 is the same as 2015 - $2,550 or $5,000 as a family. A medical FSA can be used for qualified medical expenses such as prescription drugs, co-pays, teeth cleanings, eye exams, etc. Typically items such as over-the-counter drugs and elective medical procedures are not eligible to be paid from your FSA. The dependent care FSAs are great for working parents who pay for childcare, but just like the health care FSAs, you should check out IRS.gov for a list of “approved” expenses.
This is a crazy busy time of year for all of us, but if you have an FSA through work, make it a priority over the next few weeks to check the balance and see what options you have for the unused balance (if there is one). If you only have until 12/31/15 to use the money, now might be a good time to schedule that teeth cleaning or annual physical you’ve been putting off all year. Chances are you’ve already gone through open enrollment at work but if you’ve yet to choose to participate in the FSA through your employer, take a look at potentially utilizing it. When used properly, an FSA is a great tool to help pay for the expenses most of us cringe at in – all while lowering your year-end tax bill.
If you have questions on how much you think you should contribute or if an FSA makes sense for you and your family – give us a call, we’d be happy to give you some guidance!
Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc. Nick is a member of The Center’s financial planning department and also works closely with Center clients. In addition, Nick is a frequent contributor to the firm’s blogs.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Nick Defenthaler and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. You should discuss tax matters with the appropriate professional.