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Ways to spend tax-favored FSA money if you're facing 3/15 (or later) deadline

Woman shopping for OTC medicine_FSAStore infographic_650px
FSA Store

Medical flexible savings accounts are a great tax break.

This workplace-provided benefit allows you to put money into an account before your paycheck's taxes are calculated. Then you use those tax-free funds to cover health care copays or treatments not covered by insurance.

FSAs do, however, have one major drawback. The accounts are a use-it-or-lose-it benefit. Basically, if you don't spend your tax-favored money by the end of your benefits' year, your employer gets to keep it.

In some cases, however, workers get ways to use more of their FSA money instead of losing it. And one of them, a March 15 spending deadline, is fast approaching.

Deadline near…or not: Yes, that is soon, like next week soon. Or maybe not.

Some COVID-prompted FSA enhancements could mean you have even longer to spend down the account. More on this in a minute.

Either way, you need to check with your benefits office now to find out if you have a grace period, and if so, whether it ends March 15 or later this year.

And if the spend-or-forfeit date is indeed in a few days, keep reading for some ways to spend the funds.

First, though, a quick (I promise) review of FSAs and a look at how coronavirus pandemic legislation boosted these benefits.

Two FSA safe harbors: After finally hearing complaints of FSA owners, Congress tweaked the FSA law to allow more spending flexibility.

It allowed workplaces to give accounts owners one of two ways to spend the funds beyond the end of a benefits year.

First, there's the rollover option approved back in 2013. Here, companies — 42 percent of them, according to Employee Benefit Research Institute (EBRI) research — allow workers to transfer a portion of their unused FSA funds into the next benefits year.

The amount you can contribute to an FSA and how much you can rollover are adjusted annually for inflation. In 2021, you could put up to $2,750 into your FSA. If you didn't spend it all, you could roll up to $550 to your 2022 account.

The second FSA preservation move is the already touched on grace period, which started back in 2005. This usual 2½ months of added time is offered, again per EBRI, by 36 percent of companies. It's this option that was enhanced in response to the coronavirus pandemic. It could mean that you have much longer, possibly to the end of 2022, to spend down your unused 2021 FSA money.

Note, too, that the choice of an FSA rollover or grace period is just that, a choice. Companies don't have to do either. And if they do decide to offer some FSA spending relief, they can only do one or the other, not combine a rollover or grace period.

Rollover of up to a year: Firms that decided on the grace period were given more choices to make under the coronavirus pandemic provisions in the Consolidated Appropriations Act (CAA) 2021.

When it was signed into law on Dec. 27, 2020, employers got the option to extend the usual 2½-month FSA grace period for up to a year. This choice applied to the 2020 and 2021 tax years.

Essentially, CAA says workplaces could make the grace period as long as a year. In the case of benefits provided for the calendar year 2021, that means FSA funds could be spent as late as Dec. 31, 2022.

But this grace period extension also is just a choice, not a requirement.

Employers who offer an FSA grace period could stick with the 2½ month deadline. Or they could choose another extended spending period. Or they could go all the way and give account owners until the end of this year to use up their 2021 FSA funds.

So, again, check with your employer as to when you must use or lose your FSA stash.

Don't waste your FSA money: The bottom line, whether you face a strict end-of-benefits-year deadline or have any spending grace period or get to roll over FSA money, is to take care of your bottom line.

Here are 7 ways to spend that account money now or later so that you don't lose it.

1. Buy OTC treatments. FSA owners got more help from another, even earlier piece of COVID relief legislation, the Coronavirus Aid, Relief, and Economic Security (CARES) Act. When it was enacted in March 2020, it reversed the Affordable Care Act (ACT, or Obamacare to many) requirement of a physician's prescription for over-the-counter (OTC) meds in order for them to qualify for FSA reimbursement.

OTC cold allergy sinus medications
Photo by Kay Bell

The CARES change also applies to health savings accounts (HSAs) and health reimbursement arrangements (HRAs), which also are funded by beneficiaries' pre-tax dollar contributions.

2. Pick up some personal hygiene items. In addition, the CARES Act allows for FSA, HSA and HRA money to be spent on common personal hygiene products that also are available on store and pharmacy shelves. In fact, the CARES law specifically noted that FSA etc.-eligible OTC items include tampons, pads, liners, cups, sponges, or similar products used by consumers with respect to menstruation. Since it's silly to demand a doctor's script for a naturally occurring biology reality, the law did away with that provision. And technically, it was this legislative act of making OTC menstrual products spending account eligible without doctor involvement that erased the entire ACA OTC prescription requirement. You're welcome, say all the women in your lives.

3. Consider COVID-19 costs. We made it through 2021, but we still were battling COVID-19. But at least several coronavirus-related expenses now are eligible medical expenses. You can use the tax-deferred dollars in your IRS-approved medical accounts to cover the costs of home coronavirus tests, as well as a pulse oximeter to measure oxygen saturation, and personal protective equipment (PPE).

4. Don't forget first aid. Summer will be here soon. (I hope! We're getting another freezing weekend here in Central Texas.) That means most of us will be enjoying the outdoors. It also means bug bites and scrapes and accidents as we're doing some seasonal repairs around the house. Be prepared by buying a good, and FSA-eligible, first-aid kit that help you mend most of these ailments.

5. Take care of tooth trouble. No one likes going to the dentist, but it's a good way to spend down FSA funds. Allowable dental expenditures range from basic cleanings to fillings and crowns to more elaborate dental work such as root canals and gum surgery. Your youngster's orthodontic needs also are covered here.

6. Examine eye care options, too. Basic vision needs generally aren't covered by workplace medical plans, but FSA funds can fill this gap. You can use the account money to buy prescription contacts, eyeglasses or even sunglasses. Note, however, the prescription requirement. You can't just pick up a pair of cheap off-the-drugstore-display shades to look as cool as my fellow Texans ZZ Top. (We still miss you, Dusty.)

You also can use FSA money to pay for equipment and materials required in connection with your contacts that help you get a 20-20 view, such as saline solution and enzyme cleaner.

7. Explore alternative treatments. Doctors are literal lifesavers in many cases. A lot of folks, however, prefer alternative treatments, such as acupuncture. This, as well as other alternatives like chiropractic services, are FSA eligible as long as they are for the specific treatment, cure, diagnosis, mitigation or prevention of a disease or illness. To verify that the ancient needle work or musculoskeletal manipulation meets that requirement, your FSA administrator might require a Letter of Medical Necessity (LMN) from a healthcare provider detailing the reasons for the out-of-the-box treatment. If you're relying on your FSA money for these, speak with your benefits administrator before scheduling to ensure the coverage.

Some things still not allowed: Also note that alternative treatment doesn't generally cover cosmetic surgery, even if you're able to schedule a minor nip and tuck by Dec. 31. The only time plastic surgery is an allowable medical expense is when a doctor says it is part of medically necessary procedure to treat or correct a legitimate health-threatening situation.

If you have any doubts about whether an expenditure, be it an item or a service, is medically approved by the Internal Revenue Service, check with your benefits office first. And of course, talk with your tax professional.

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