Ladies and gentlemen, the near-impossible has happened: A Republican and a Democrat have jointly proposed a sensible law. Congressmen Charles Boustany (R-La.) and John Larson (D-Conn.) have introduced the Medical Flexible Spending Account Improvement Act (H.R. 1004) bill, which could help Americans setting aside money for medical expenses keep more of what they've saved.
Flexible Spending Accounts (FSAs) let you sock away pre-tax dollars from your salary to spend on qualifying medical expenses. Right now, your employer determines the limits on your FSA contributions, although a new limit of $2,500 will apply beginning in 2013, with adjustments for inflation thereafter.
Don't underestimate the FSA's power. If you earn $50,000 per year, and contribute $4,000 annually to an FSA for health-care expenses, you'll reduce your taxable income to $46,000. At a 25% marginal tax rate, that will save you $1,000 in income taxes!
The catch -- and the fix
But up until now, this wonderful tool's had a "use-it-or-lose-it" rule; if you don't spend all of your allotted money in a given year, whatever's left vanishes. That may explain why, as of 2010, only 20% of U.S. workers were using FSAs, according to Hewitt Associates. As Joe Jackson, chairman of Save Flexible Spending Plans and CEO of benefits provider WageWorks, explains, "Unfortunately, the 'use it or lose it' rule creates an unnecessary risk for FSA participants and a deterrent for non-participants."
It's estimated that a quarter of participants forfeit some of their money each year. A tool that was meant to help workers save money actually ends up costing them a total of about $85 per forfeiture, which ends up in employers' coffers.
Boustany and Larson propose changing the rules so that any money left in the account at year's end isn't forfeit. Instead, it can be withdrawn, with the worker paying the previously avoided tax on the sum. Presto -- a simple fix.
If you've got an opinion on this proposal, consider contacting your representatives in Congress, to let them know.
Until or unless the rules get revised, you're stuck with the use-it-or-lose-it provision. If you fear ending up with leftover funds, take a closer look at eligible expenses -- you may be able to apply more of your health-related costs than you think. Qualifying expenses include hearing aids, psychiatrist visits, weight-loss or smoking-cessation programs, co-pays, X-rays, teeth cleanings, glasses, and much more. Your FSA can even cover transportation costs to receive medical care.
By making the most of FSAs -- especially if the use-it-or-lose-it provision is erased -- you can save lots of money. Visit the following sites for many more tips on how to be tax-savvy:
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