As the year-end holidays approach, it may be time to empty out your health flexible
spending account (FSA). Here’s an overview of the tax rules for these accounts.
The tax savings. If your employer offers a health FSA as a fringe benefit, you
can fund your account through pre-tax contributions. That means you save on
both income and payroll taxes. Withdrawals made during the course of the
year are exempt from tax as long as the money is used to pay for qualified
Contributions. Annual contributions to your health FSA are limited. The limit for
2016 is $2,550. For 2017, the limit will be $2,600.
Qualified expenses. The list of qualified expenses ranges from prescription
drugs to wheelchairs and generally mirrors those that would be deductible as
itemized medical costs on your personal federal income tax return.
Why you might need to empty your account. Under the basic “use it or
lose it rule,” funds remaining in your account at year-end are forfeited. To avoid
that outcome, you might want to schedule routine doctor and dentist visits,
such as a medical exam or dental cleaning, in December. However, your employer
can extend the deadline by authorizing a grace period of up to 2½ months after
the close of the year. Alternatively, your employer could allow you to carry
over up to $500 to 2017.