Year-end checklists for flexible spending accounts

This is a good time of the year to shore up this year's flexible spending account (FSA) expenditures and prepare for next year's.

The FSA I'm talking about here is a plan that may be offered through your (US) employer, whereby a part of your paycheck is withheld each period, pre-tax, to pay for qualified medical expenditures throughout the year. So for example, let's say you make $70,000 per year and you elect to withhold $3,900 for use in your medical FSA for that year. Assuming you get paid every other week, you would have $150 deducted per paycheck. Throughout the year you could get reimbursed for up to $3,900 of qualified medical expenses, and your taxable income would be $66,100 rather than $70,000 (assuming you had no other deductions and that you used the entire $3,900).

The flip side of this deal (and there's always a flip side) is that (a) you can't change your allotment unless something big happens, like a marriage, divorce, birth, adoption, or death — something that changes the makeup of your family, and (b) if you don't use it in the alloted time, you lose it.

Here are a few checklists I'll be going through for making sure I'm using my FSA as well as I can.

Before mid-December. This is the time when I'll need to have my allotment submitted for calendar year 2008 — I'll need to tell them, “Please withhold $X,000 from my paychecks for the next year.”

• Review what expenditures will be covered for the next year. Many of the same types of expenditures that were covered this year will likely be covered next year, but there may be new types of purchases (like acne treatments) that will be covered, or there may be restrictions on other kinds of expenditures.
• Check to see if you've been getting reimbursed. This might seem like a “duh” suggestions but I recently found out that I wasn't getting reimbursed for expenses that were reimbursed automatically in 2006! Somehow that system got broken, and I need to fix it. If you've spent the money on qualified expenses, you should be able to get reimbursed at any time during the year, even if you haven't contributed the money yet.
• Double-check what records you need to keep for reimbursement. This includes receipts and/or UPCs from OTC remedies, receipts from medical and dental providers, doctors' notes for items that have restricted reimbursement conditions (like for breast pumps, for example), and insurance reimbursement letters for submitted expense claims.
• Review what you spent on covered expenses this year. This includes qualified out-of-pocket expenses for medical visits and prescriptions, as well as expenditures for qualified over-the-counter remedies or medical equipment. Adding all of these up will give a baseline for next year's allotment. This amount could be substantially higher or lower than what you alloted for this year. If you didn't allot enough, then that's fine; you might stand to bump it up a little bit. If you alloted too much, then you have a little spending to do or else you'll lose it, so read the next section “Before the end of the year (or before mid-March, 2008)” for some ideas.
• Estimate what expenses will go away and which ones will begin. This is where you can make the additions or subtractions to give a better estimate of what you'll be spending so that you can use the FSA effectively. If, for example, you have been going to physical therapy this year and you're almost through the therapy, you can take those expenses off of what you'll withhold. However, if you know that you'll have some expensive dental work coming up, then you'll add those in. This is also a good time to get estimates from people providing your care, because estimates from them are better than what you could do on your own. Also consider that if you have a grace period, you can claim 2007 expenses through the first part of 2008, so you may only need to plan for 9 1/2 months' worth of expenses if you'll need to go through your 2007 allotment during the first part of 2008.
• Re-enroll and put in your allotment! In most cases (mine at least) enrollment is not automatic. Re-enrollment must be done every year, and there is only a few weeks to do it, usually right now (late November, early December). Check with your employer to see when this period is and make sure you get the information in before the deadline. A week or more before the deadline is best, because the call centers or website will likely be overloaded the day before the deadline.

Before the end of the year (or before mid-March, 2008). This is the time by which you need to have spent your allotment. I don't think it's ever earlier than the end of the year, and many places now have a 2 1/2 month grace period, meaning that you can spend your 2007 FSA allotment until mid-March, 2008. This grace period is in place with my employer, but it may not be in place everywhere, so check.

• Review what you've spent. In my case, we've spent way more than we alloted, so we're in no danger of under-spending. If you've added up all of your qualified expenses (say $2,500) and you allocated $3,500 for 2007, then you need to spend $1,000 before the use-or-lose period ends.
• Plan quickly how you'll spend the money if you need. If you still have a bit to go through because you over-withheld, then it's wiser to just burn through it instead of letting it pad the bottom line of the company managing your FSA. Depending on whether the grace period is in place or not, you may still have a few months to spend the money. If not, then you have until the end of December, which still is a few weeks away, so it's not extremely urgent, but you can't lolly-gag. Some ideas: Dental work you've been putting off is a good candidate, since it's likely that more dental expenses will be out of pocket. Stocking up on OTC pain relief is another good way to burn through some allotment. (Name-brand medicines are more expensive than generic.) I understand this isn't the best way to use your allotment but, given the choice between getting something or getting nothing, I'd choose getting something. To avoid this problem in 2008, simply have less withheld than you did this year.

Before the books are completely closed on 2007 (usually end of April, 2008). This is the time when you have to have claimed all of your 2007 expenses. You'll have needed to spend the money before (at the latest) the end of the grace period, but after the end of April (approximately) you can't claim them even if you spent the money.

• Claim all of your reimbursements. Hopefully you have enough records of qualified expenses that you can submit the claims before the deadline. Try to get these in before the last day so that if there are hiccups you at least have some breathing room to submit them again.

I think most of these suggestions apply pretty universally but please check through your employer what the specific dates are for your situation. This is meant for information purposes only and is meant to serve as a starting point for your own research. Having said that, I hope that it was helpful.