With the end of the year quickly approaching, it is a great time for families to take stock of any potentially unused funds in flexible spending accounts (FSA’s). Flexible spending accounts for both health care and dependent care are structured as “use it or lose it” arrangements. This means that while there are strong tax-benefits for funding these accounts, their benefits can be quickly erased if funds go unused.
The good news is that legislation passed in relation to the coronavirus pandemic expanded some of the considerations for 2021 and 2022. Two of the potential options for unused funds are:
The ability to rollover certain dollar amounts into 2022
A grace period that could range from several months to the entire year
However, it is entirely up to your employer for their plan’s specific rules, so it is important to check on your company options.
Here is a step-by-step guide to taking advantage of this planning opportunity and make sure your hard-earned dollars are working for you:
1. Review the amount of funds that you may have not used in 2021.
2. Determine your plan rules for the allowance of any rollovers or grace periods.
3. Develop a plan for ways you can spend unused funds in meaningful ways based on the answers to number one (1) and two (2) above.
Ways to Spend FSA for Healthcare
To be eligible for reimbursement from your FSA, expenses must meet the IRS definition of “qualified medical expenses”. Here are a several ways to spend and invest your healthcare dollars:
· Annual health exam(s) that you may have put off
· Dental treatment or exams (as long as not cosmetic)
· Eye exams
· Contact lenses
· Over the counter medications (as long as not cosmetic)
· First aid supplies
Ways to Spend FSA for Dependent Care
Given the nature of dependent care costs it may be more challenging in determining a plan of action for unused funds. However, that does not mean with some level of planning you can find potential options.
The main requirements are the expenses need to be for qualified day care expenses for children under the age of 13 who are not capable of caring for themselves.
One option that may have the most flexibility is the use of a babysitter that is work-related (not for a night on the town). Childcare can also be provided by a family member who is not a tax-dependent.
Some examples of qualified dependent care expenses are as follows:
· Daycare centers
· Preschool tuition
· Camps (with certain requirements)
· After school programs
· Babysitters (work-related)
· Babysitting by a family member who is not a tax dependent (work-related)
Invest your hard-earned dollars
Flex spending accounts offer strong tax incentives for funding. However, if you are consistently underutilizing your balances these funds are going to waste. Now is the perfect time to plan around your specific options to make sure you are investing your hard-earned dollars into your family’s health and well-being.
GuidePoint Financial Planning - Reston Va Financial Planning
Ryan Phillips, CFA, CFP® is the founder of GuidePoint Financial Planning. He is passionate about helping busy families plan, save, and invest for their financial future. Contact him today if you are interested in learning more about the benefits of working with a fee-only (no-commission) financial planner.