Flex-Ed: 4 common FSA misconceptions
We get it. FSAs can be confusing. Between the eligibility lists, the potential to roll over some of your unused funds, even contribution limits, your FSA may be more stressful than anything else. (Though there are some FSA-eligible items that can help combat that.)
We compiled a list of four common FSA misconceptions, from where your unused FSA funds end up to the real rules about stockpiling. The more you know, the farther your FSA can go.
Misconception #1: It's your employer's decision to reclaim your unused FSA funds if you miss the deadline.
This rule comes from powers greater than the occupants of the corner offices. According to IRS rules, any FSA funds that aren't spent before your plan deadline (or after a grace period, if your plan has one) goes back to your employer. This money can also roll over to the following year's account, giving users even more flexibility with their flex spending
Did you know that more than $400 million in FSA funds are lost by FSA account owners each year? If you remember nothing else about your FSA, remember this: use it or lose it.
Misconception #2: Your company can spend your unused FSA funds however they want.
Your company uses reclaimed, unused FSA monies to help offset the cost of administering the FSA plan or to pay off any deficits. They can also return the money to employees via what's called pooling. But the latter is rare, so don't count on it. (Sorry.)
Sure, it can be frustrating that your company gets first dibs on your unused FSA funds. But keep in mind that they may take a loss by offering an FSA plan to employees. For example, if you use all your FSA funds in the early part of the year then leave the company, your employer has to shoulder that balance.
Misconception #3: I can wait until the end of the year, then blow my FSA funds on the eligible items I'll need the next year right before the deadline.
While not expressly forbidden by the IRS, this is definitely frowned upon. Here's why: Your FSA was made available to purchase the products you need for the specific timeframe, like the copay for your annual physical, your monthly supply of contact solution, or the sunscreen you'll need for your beach trip this summer.
FSAs are meant to alleviate the day to day financial burden of health-related items and services, like picking up a prescription, grabbing cotton balls, buying your allergy medication. They're not intended to be a means for buying a year's supply of nasal spray in one fell swoop. Plus, that stuff expires, anyway.
Misconception #4: As long as my purchase is similar to an FSA-eligible item, I should be covered.
While this misconception is understandable, the rules about what is FSA-eligible – and what isn't – are pretty cut and dry, and there isn't much ambiguity. For example, prenatal vitamins are covered because they're considered medically necessary for healthy pregnancies. But traditional vitamins aren't, because they're not directly connected with diagnosing, preventing or managing a specific medical condition.
Diapers are also confused, since standard diapers don't qualify, but training pants (like Pull-Ups) do, because they're used to prevent bedwetting and incontinence.
These are just a few examples. Check out our eligibility list if you're unsure, because it's better to be FS-safe than sorry.
New to FSAs? Need a refresher course in all things flex spending? Our Flex-Ed column gives you a dose of FSA Living 101, offering tips for making the most of your tax-free funds. Look for it every Thursday, exclusively on the FSAstore.com Learning Center.