Many people use their Flexible Spending Accounts (FSAs) to help pay for medical costs and co-pays. These accounts are funded with pre-tax dollars, so contributions to the accounts represent a tax deduction. Using pre-tax dollars to make health care purchases is one way that you can make the most of your money. This is especially helpful, since items like bandages, over the counter (OTC) medications, crutches and other items not usually covered by health insurance can be purchase using your FSA. The convenience factor was even expanded by the fact that many FSAs have debit cards attached to them.
But some of the convenience goes away this year. January 1, 2011 marked the beginning of new rules governing OTC medications and debit card use with the FSA. The new rules don’t change what’s eligible with a FSA, but they do change whether or not you will actually be able to pay for it. Here's a recap of the FSA changes for 2011.
Big FSA Change: Prescriptions for OTC Medications
The biggest change to watch out for is that you can no longer use FSA money to pay for over the counter medications unless you have a prescription for them. This means that if you want Ibuprofen, cough syrup, allergy medicine and antacids to be eligible for FSA money, you will need to call your doctor and ask for a prescription. In most cases, it is likely that your doctor’s office will simply call in the prescription for you, but it still creates an extra step that you (and your doctor) will have to complete.
The good news is that non-medicine health care supplies, like bandages, condoms, and crutches, as well as non-prescription insulin, can still be bought using FSA money without a prescription.
New Flexible Spending Account Debit Card Rules
The other major FSA change to watch out for deals with where you can use a FSA debit card to pay for prescriptions. You can still use your FSA debit card to make non-drug purchases without much trouble. However, if you are purchasing medications — prescription and non-prescription — you cannot use your FSA debit card unless you are doing so at a business that gets 90% of gross receipts from medicine sales. This means that if you get your medications at a club store, grocery store, or some sort of superstore, chances are that you will have to shell out using after-tax dollars and then apply for reimbursement from your FSA.
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You have until January 15, 2011 to make medication purchases FSA debit card wherever you want, and then you need to double check how you use your debit card to purchase drugs.
You want to make sure you do it right, since the IRS will be keeping tabs. The penalty for disobeying the new FSA rules is to have the ineligible amount that you paid added to your gross income. On top of that, you might end up with a penalty amounting to 20% of the offending purchase. Realize, too, that the new rules apply as of January 1, 2011 — no matter if you have extra time to use up the balance in your account. Some plans will give you an extra couple of months in the new year to use your FSA money; even if this is the case, all 2011 purchases have to abide by the new rules.
So, before you start using your FSA money, make sure you check with your plan so that you understand the new rules. You don’t want to find out the hard way.
This is a guest post. Miranda Marquit is a journalistically trained freelance writer and professional blogger working from home. She has been a contributor for Mainstreet.com, Personal Dividends and several other sites. Miranda is not affiliated or endorsed by LPL Financial.
The opinions voiced in this material are for general information and are not intended to provide specific advice and/or recommendations for any individual.