Flexible spending accounts offer a great tax-saving opportunity. When you contribute to an FSA to cover your medical costs, that money goes in on a pre-tax basis, and your associated savings are a function of your effective tax rate. So if, for example, you contributed the maximum this year, which is $2,600, and your effective tax rate is 30%, you basically saved yourself $780.
But while FSAs are indeed a wonderful thing, they do come with one major drawback, and it's that your money goes in on a use-it-or-lose-it basis. In other words, you're required to estimate your medical spending for the year in advance, and then spend down that balance by the time your plan year is up. Fail to rack up enough eligible expenses, and you risk forfeiting money.
Now in many cases, FSA plan years align with the calendar year, so that if you're dealing with a 2017 FSA, you only have until the end of December to use up the rest of your balance. There are, however, a couple of exceptions. FSA laws allow employers to offer plan participants a rollover option, where you can move up to $500 of your balance to next year's pot, or a grace period, where you get an extra two and a half months to deplete your account. Keep in mind that companies can only grant one of these two provisions, and that not all companies do.
If you're looking at a pretty significant FSA balance and are wondering how on earth you're going to use it up by the end of the year, the first thing you need to do is make sure you actually have to. But assuming your employer doesn't offer a rollover or a grace period, here are a few options for depleting your FSA balance without feeling like you're throwing money away.
1. Push up key medical appointments
If you're due for a specific doctor visit in January or sometime early next year, see if you can squeeze it in before the end of the month. Some medical offices get cancellations around the holidays when patients' travel plans change, so it pays to find out what your options are. Also, keep in mind that you can submit claims for travel expenses to and from medical treatment, so if you're sitting on a sizable balance and know you need to see a doctor who's 50 miles away, it'll help to do so before your plan year runs out.
2. Stock up on medications
Most insurances require that a certain amount of time pass between your last prescription renewal and your upcoming one. In other words, rush to renew a prescription early, and it may not get covered. But if you're able to push up a renewal by just a few days to get it in by the end of the year, it may very well fly insurance-wise, and then you'll have something valid to claim against your FSA. If that's not an option, then you might consider talking to your doctor and seeing if he or she can write you a new prescription rather than prematurely renewing an old one.
3. Load up on medical supplies
There are several over-the-counter medications that are eligible for FSA reimbursement -- provided you have a prescription for them. On the other hand, there are numerous health items that don't require a prescription, so if you're sitting on a balance, you might consider purchasing some. These include:
- Athletic braces.
- Blood pressure monitors.
- Contact lens solution.
- Hearing aid batteries.
- Heating pads.
Now this isn't to say that you should go to the store and start throwing random items into your shopping cart for the purpose of spending down your FSA. But since some of the above items are things you'll most likely come to need, like bandages and sunscreen, then you might as well buy them now rather than lose money.
The tricky thing about FSAs is that it's hard to predict how much you'll spend in medical costs over the course of a given year. But going forward, it actually pays to err on the side of underfunding your account rather than doing the opposite. While you might miss out on a bit of tax savings by putting $100 less than needed into your account, it's a better scenario than kissing that money goodbye because you had no way to use it up.