Tax Tip of the Week
For the week of November 8, 2004

Remember to use up the funds
in your flexible spending account

Many companies offer a flexible spending account (FSA) as part of their employees' benefit package. If you participate in an FSA, you are allowed to set aside pre-tax dollars from your paycheck to pay for certain unreimbursed health costs, such as co-pays or deductibles. The major drawback is that you forfeit any unused dollars in your account at the end of each plan year.

As year end approaches, plan ahead to make sure you use up all the money you’ve put into your FSA for medical expenses. You may need to schedule a dental visit, buy new eyeglasses, or pay for a flu shot. Fortunately, it could be a little easier to use up your account this year than in the past. That’s because a rule change towards the end of 2003 expanded the list of items that qualify for FSA spending.

More expenses qualify. Under the old rules, you could spend your FSA only on items that qualified as an itemized deduction under IRS rules – generally prescription drugs, doctor, dentist, and hospital costs. But the expanded list includes nonprescription drugs and some medical supplies. So now, if you’re at risk of forfeiting dollars in your FSA, you can always stock up on pain relievers or other everyday over-the-counter medications.

A few words of caution though. Items such as vitamins or dietary health supplements generally don’t qualify under the new rules. Toiletries and cosmetics are also ineligible.

Before you rush out to the drug store, check with your plan administrator. The list of eligible items may vary from plan to plan. And note that the expanded list applies only to your FSA. The rules on what qualifies as an itemized deduction on your tax return did not change.

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