What Is an FSA plan, and Will FSAs Change with Healthcare Reform?

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Reader Question: Can you explain FSAs and if reform will change them?

A Flexible Savings Account (FSA) is a way to pay for co-payments and other eligible costs not covered by your health plan. The key aspect to an FSA is that you elect an amount and that entire amount is available for you to use on eligible expenses immediately. You choose the amount you wish to pay into the account for the upcoming year, and this amount is deducted from your earnings over the course of the plan year. So if you elect $500 to go into your FSA account, that amount is available all at once and you essentially “pay it back” through even deductions for your pay. You either pay for a service or item with an FSA card, which acts like a debit card, or you pay for a service or an item out of pocket, make a claim, and are then reimbursed.

Contribution Limits

Fortunately, healthcare reform isn’t causing quite as many changes to FSAs as it is for Health Savings Accounts (HSAs) and Health Reimbursement Accounts (HRAs). The biggest change will be to how much you can contribute.

If you’ve had an FSA, you may remember being able to choose a higher limit as determined by your employer, who has to put a cap on it by law. Generally, employers chose caps around $2K or $3K, but as of Jan. 1, 2013, you can only elect up to $2,500 a year. Not to worry — this limit will change as needed to account for inflation. Fortunately, this proves to be more than sufficient, because according to an annual report about healthcare benefits from Mercer, the National Survey of Employer-Sponsored Health Plans, the average HSA employee contribution is less than $1,500 annually.

In some instances, employers may contribute to FSAs too. For example, your employer may offer occasional contributions or sometimes even regular contributions as an incentive to participate in certain health activities as part of wellness programs. For example, an employer could pledge to make a regular $10 contribution to your FSA account monthly if you wear a pedometer and report how many steps you take monthly, or some employers may give you one-time contributions if you participate in eligible activities like taking a class on quitting smoking.

To determine how much you want to put into your FSA, calculate how much you and your family will need over the coming year to meet healthcare-related costs that aren’t covered by your health plan, such as deductibles, prescriptions, co-pays, expenses like glasses, contacts, OTC medications, and other eligible health-related items or services. Make this a conservative estimate, as any money left in the account at the end of the year is forfeited — the “use it or lose it” reason HSAs are sometimes not preferred. Congress has been considering allowing an amount to be carried over to the next year, but as of yet this isn’t the case.

Since FSAs are “use it or lose it,” it’s critical to choose an accurate amount. A common mistake is electing an amount equivalent to the deductibles on health insurance plans. This can result in a huge waste of money for people in good health and those who don’t have regular medical expenses like prescription drug costs. Typically, people in good health elect higher deductible health plans anyways, so choosing an equal amount can mean not only losing money at the year’s end, but losing a lot of it.

Eligible Expenses and Making Claims

The best way to manage an FSA account is to make claims as you incur costs or send in claims once a month. Usually you’ll receive an FSA statement monthly detailing what you’ve spent, approved claims and/or denied claims, and balances, so you can plan to make any claims when you get these. Usually your monthly statement will include a portion you can fill out to make claims with or you can download claim forms from the plan administrator’s website. As of 2011, you need to provide receipts and can only use your FSA on items specifically prescribed by a doctor.

If you pay for an expense with an FSA card, you’re making a claim each time. Similarly to checking accounts and credit cards, just because a transaction is approved doesn’t mean it’s truly “approved” and that it’s a done deal. Each use will be reviewed like a claim. If it’s determined an ineligible expense, you can and will receive a bill and the transaction can be reversed.

Sometimes you may receive a request for further information regarding a transaction. For example, if you use your card at a pharmacy and buy nail polish and candy when paying for prescriptions, the transaction may be approved, but once the administrator sees a questionable expense, they may ask for a more detailed receipt. The majority of the time you won’t have to worry about this — usually your transaction won’t be approved if it’s not an eligible service or item, and sometimes you could frustratingly face denied transactions even when paying for expenses you know are eligible. You need to provide receipts and have a prescription even for over-the-counter drugs and medicines if you want to be reimbursed.

There’s only one period of time every year (an open enrollment period) in which you can elect an FSA and make changes. Employees cannot drop out of the payments into the account for that year unless there’s a change in family status — in other words, if they’re recently divorced or if their spouse or partner dies. The deadline for making claims is April 30, another date to be mindful of.

It’s a lot of details and isn’t for everyone, but if you elect an HSA, learning the details is worth the effort. The money you put in HSAs may not be tangible bills in your wallet, but it’s still your hard-earned money. As the wise man on everyone’s favorite piece of currency said, a penny saved is a penny earned — with HSAs, a penny you don’t use is a penny you lose, and that can be a lot of wasted earnings.

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