Nov 18, 201311:09 AMSmall Business, Big Ideas
with Jean Willard
The end of the year is near; don’t forget your flexible spending account
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As the year draws to an end, we focus on our many blessings, buy gifts, and celebrate the holidays. Many of us also begin to think about tax planning. We ask our CPAs to check our withholdings and estimates, help us decide about charitable gifts, and avoid penalties.
We also need to remember the flexible spending accounts many of us have, especially because there’s a new rule for 2013.
For those who might not know, employer-sponsored flexible spending accounts (FSAs) allow employees to defer pretax dollars to pay for certain medical expenses, such as doctor’s charges and prescription medicines. There might be many other medical expenses that qualify for coverage, but this plan has an annual limit and a use-it-or-lose-it requirement.
For example, if you elected to defer $2,400 of your income to be set aside in your flexible spending account for 2013, you could then charge your doctor’s visit co-pay, your prescriptions, and certain other medical expenses against this account. At the end of the year (Dec. 31), you need to use the funds in the FSA account or — based on the original language of the law — lose the remaining value in the account. So if you have only spent $2,000 on medical costs up to this point, you risk losing $400.
In more recent years, however, this law has undergone some modifications that allow an employer to amend its plan to allow a “grace period” of two and a half months after the end of the year for using up those qualified expenses.
In addition, this year the U.S. Treasury Department announced in Notice 2013-71 that it will be relaxing its rules in order to allow employers to provide an option to participants to carry over up to $500 of unused funds into the following year. This is being done because they have found that most forfeited amounts are $500 or less at year-end. Many people, when they make the annual election to defer funds, do not know what their medical bills will be in the following year. Therefore, employees risk losing funds at the end of December unless they carefully plan throughout the year. This new notice requires an amendment to your employer’s plan.