Created to help employees reduce out-of-pocket medical expenses, flexible spending accounts (FSA) are an employer-provided benefit that allows employees to set aside pre-taxed funds into a special account through payroll deductions. An individual can use FSA funds to help pay for copays or treatments not covered by medical insurance. Rules regarding FSA funds affect the amount of money individuals can set aside for the following year.
Beginning in 2011, an employee must incur medical expenses during the specified claim period to receive reimbursement. Any money left in an FSA when a claim period ends will not be returned to the employee or carried over into the next year. Additionally, an employee cannot access expired unused funds to pay for an expense eligible for reimbursement in a separate account.
With the exception of insulin, employees cannot use FSA funds for over-the-counter drugs. Drugs eligible for reimbursement are only those prescribed by a physician. "Kiplinger" advises its readers to ask physicians to prescribe over-the-counter medications used regularly so they can purchase them using FSA money. Nonprescription medications individuals may use often include allergy medications, cough and cold medicines and pain relievers. In order to receive reimbursement, an employee must provide the company's FSA provider with a copy of the prescription and a receipt. Those who break the rules and use FSA funds for medical expenses that do not qualify for reimbursement can face a charge for the amount used, plus an additional 20 percent.
Coverage for Adult Children
Only children considered dependents for tax purposes are eligible to receive coverage under a parent's FSA account, no matter the age of the child or eligibility for coverage under a parent's group health insurance plan. Employees can include any child who is under the age of 27 in an FSA account, even if the child is not claimed as a dependent or does not live in the parent's home. Before making a decision about how much money to set aside in an FSA fund, it is a good idea for an individual to ask the human resources department in her company about the eligibility of her children to use FSA funds.
Employees can save up to $4,000 in a flexible spending account per year. In the year 2013, however, maximum annual contributions into FSA accounts shrink to $2,500. Therefore, it is to an individual's advantage to undergo elective medical procedures, such as laser eye surgery, before the change takes place.