Getting the most out of your FSA

It's crunch time for employees with flexible spending accounts, which allow them to use pre-tax dollars to pay for out-of-pocket medical expenses. While deadlines vary from employer to employer, some participants have until the end of May to file for reimbursement.

About 33 million people use an FSA, with 85 percent of employers having more than 500 workers offering them. Those workers realize an overall tax benefit by using an FSA, but many employees have sworn off them, either because the reimbursement process is a hassle, or they've lost money by setting aside more than they can spend, or they simply missed the deadline -- the most aggravating reason of all.

Members of Congress are starting to consider changes to the program. When over-the-counter medications without a doctor's prescription became ineligible expenses in 2011, many employees complained to their representatives about the cumbersome system.

"It's become a wake-up issue," said U.S. Rep. Erik Paulsen, R-Minn., who received numerous calls and e-mails.

Here's a quick review of current FSA rules and proposed changes.

How much is forfeited by FSA users each year?

An average of about $75 is lost, said Jody Dietel, chief compliance officer at WageWorks, a provider of consumer-directed benefits. But with an average election of $1,400, even participants leaving $75 on the table still see a net reduction in taxes of about $200 or more, depending on their tax bracket.

No. By law, the money is forfeited to your plan sponsor, which is usually your employer, to reduce the cost of administering the accounts. You could consult a tax adviser about including them as a deduction instead, said Jeff Shelman, communications manager at HealthPartners/Regions Hospital.

What happens if an employee quits midyear and FSA contributions stop?

If the employee has already spent the total amount in the account, he is not required to pay off the balance not yet contributed through payroll deduction. That's an advantage for employees but not for their employers. On the other hand, employees lose any unspent money in the FSA accounts unless there are legitimate medical expenses incurred before they leave. The losses and gains usually balance each other out, said Dietel, but any funds the employer keeps must be used for plan administration and not for other purposes.

How can I appeal if an expense has been denied?

First, note why the claim was denied. Most expenses are denied because they're ineligible or because they exceed the patient's FSA balance, said Dietel. Last year many over-the-counter drugs such as headache remedies and allergy medications, which were once eligible expenses, were rejected. Those expenses now require a doctor's prescription. Unless the item is being used to treat an illness or condition, it's not eligible. Denied claims can be appealed to the third-party administrator where the claim was originally sent. Check your employer's summary plan description for guidelines on appeals.

Keep all receipts and required forms in one folder or envelope. Include the administrator's phone number and website and a list of eligible and ineligible expenses, said Shelman. File for reimbursement as soon as possible. That cuts down on lost receipts and forgotten expenditures. Other ways to avoid problems include taking advantage of automated features, such as automatic claim submissions or debit cards.

What changes are happening?

In 2013, the maximum spending amount will be $2,500. (The current limit is usually between $2,500 and $5,000, depending on the employer.) Paulsen has introduced legislation to repeal recent changes (implemented under the Affordable Care Act) that require a doctor's note to cover over-the-counter drugs and the $2,500 limit in 2013. Paulsen also supports legislation allowing FSA participants to roll over any unused money into the following year instead of forfeiting it.