Flex Spending Accounts

March 09, 2012
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Flexible Spending Accounts No Longer As Flexible
by Cathy Pareto, MBA, CFP® – August 2011

Conceptually, flexible spending accounts make a lot of sense. After all, who can deny that paying for medical and health related items on a pre-tax basis is a tax efficient way to pay for services or products. But, buyer beware. These plans became a lot more administratively complicated for consumers in 2011 and they are no longer as convenient as they once were, so careful evaluation is needed if you are considering this program for yourself and your family.

Flexible spending accounts (FSA) are employer sponsored benefit plan arrangements that allow employees to pay for certain health care or dependent care expenses on a pre-tax basis. To maintain a tax-qualified status, flexible spending account plans must comply with special requirements under Internal Revenue Code Section 125 for cafeteria plans. Employees participating in FSA’s contribute to the plans through a salary reduction. Funds contributed by you and your employer are not taxes and are available for withdrawal for qualified medical expenses at any time. Participants are given a debit card for charges and may also submit for expense reimbursements if a debit card is not used. It is strongly suggested that you save all of your receipts, as it is not uncommon for the FSA provider (typically a payroll company) to reject transactions or reimbursement requests until you provide adequate proof of service or purchase.

Sounds great so far, right? Here comes the tricky part.

Unfortunately, once your benefit elections are made they cannot be changed during the plan year even if you experience a valid life status change event. Moreover, since amounts that remain in employees’ accounts at the end of the plan year are forfeited under the “use-it-or-lose-it” rule, employees should plan conservatively so to not fund their accounts with amounts greater than the expenses they expect to incur. Many account owners don’t know how much they have left, which increases the likelihood they’ll forfeit some of their funds. Your plan administrator should be able to tell you your balance by phone and most plans provide up-to-date information on their Web sites.

The Affordable Care Act, enacted in March 2010, established a new uniform standard that, effective Jan. 1, 2011, applies to FSAs. Under the new standard, the cost of an over-the-counter medicine or drug cannot be reimbursed from the account unless a prescription is obtained from your doctor. The change does not affect insulin, even if purchased without a prescription, or other health care expenses such as medical devices, eye glasses, contact lenses, co-pays and deductibles. Co-pays and deductibles continue to be reimbursable from a health FSA after Dec. 31, 2010.

This change in the rules for over the counter (OTC) medicines and products has created a much greater burden for employees using FSA’s to provide evidence to their benefits company that they have a medical need for something as trivial as anti-gas or antacid pills. Can you say nightmare? Imagine having to ask your busy doctor for a prescription for aspirin or Alleve? What was once a no brainer plan for employee participants has become much more difficult to manage from a consumer’s standpoint. Here’s an abbreviated lists of OTC Medicines & Drugs and the requirements for it to be deductible through the FSA.

The following categories of items will always require a doctor’s prescription:

  • Acid Controllers
  • Allergy & Sinus
  • Antibiotic Products
  • Anti-Diarrheal
  • Anti-Gas
  • Anti-Itch &Insect Bite
  • Anti-parasitic Treatments
  • Baby Rash Ointments/Creams
  • Cold Sore Remedies
  • Cough, Cold, & Flu Remedies
  • Digestive Aids
  • Feminine Anti-Fungal/Anti-Itch
  • Hemorrhoid Preparations/Suppositories/Cream
  • Laxatives
  • Motion Sickness
  • Pain Relief
  • Respiratory Treatments
  • Sleep Aids & Sedatives
  • Stomach Remedies

OTC products that are not medicines or drugs are reimbursable without a doctor’s prescriptions. The following are some example of OTC products that are available without a doctor’s prescription:

  • Band Aids
  • Birth Control
  • Braces & Supports
  • Catheters
  • Contact Lens Supplies & Solutions
  • Denture Adhesives
  • Diagnostic Tests & Monitors
  • Elastic Bandages & Wraps
  • First Aid Supplies
  • Insulin & Diabetic Supplies
  • Reading Glasses
  • Wheelchairs, Walkers, Canes

One cannot argue with the obvious tax benefits of having an FSA account. Paying for medical expenses on a pre-tax basis is a no-brainer. If your employer offers this benefit, you should consider enrolling in it. Just be forewarned that careful planning and organization is highly suggested when considering a flexible spending account, and be aware that what was once easy to obtain reimbursements for has become a greater administrative challenge.