A column on personal finance prepared by the Virginia Society of Certified Public Accountants


January 22, 2004) – Millions of American workers have access to employer-sponsored flexible spending accounts (FSAs), but less than 20 percent of those eligible sign up. As a result, these individuals may be paying more than they have to for medical and dependent care. The Virginia Society of CPAs explains that a FSA makes it possible to pay for certain eligible expenses on a pre-tax basis. What’s more, two recent IRS rulings expand the expenses that qualify and make FSAs more user-friendly.

Over-the-Counter Drugs Now Included

In September 2003, the IRS announced that flexible spending accounts can be used to buy nonprescription drugs. This change is significant because most over-the-counter (OTC) drugs are not covered by health insurance plans.

Adding nonprescription drugs to the list of approved FSA expenses addresses the movement of many prescription drugs to the over-the-counter market. While such a move typically lowers the price of a drug, it could increase your out-of-pocket costs since it’s no longer covered under your prescription plan. The new ruling also makes it easier for participants to use funds in the FSA to stock up on over-the-counter medications rather than forfeit the money left in the account at year-end.

Under this ruling, medications such as pain relievers, allergy and cold medicines, and antacids now qualify for reimbursement. Dietary supplements and toiletries such as toothpaste, mouthwash, and shampoo do not.

New Debit Cards Help Track Expenses

To ease use, the second IRS ruling authorizes employers to provide debit cards to employees who sign up for FSAs. Debit cards allow FSA participants to pay for qualified expenses by drawing against their flexible savings accounts in much the same way as a debit card would be used at a grocery store. Companies issuing debit cards have safeguards in place to ensure that the cards can’t be used for unqualified expenses.

While debit cards eliminate the need to file claims and wait for reimbursement, CPAs say it’s a good idea to hold onto your receipts just in case your employer challenges any expenses.

Carefully Determine How Much to Contribute

Despite the recent enhancements to flexible spending accounts, any money that is not spent by year-end must be forfeited. It is still important to carefully project how much money to contribute for the year.

Begin by estimating the costs of regular medical, dental and eye examinations. If you take a prescription drug or over-the-counter medication regularly, add up your annual cost. A look back at past years’ healthcare records may be helpful in projecting other expenses.

Any expense that is considered a deductible medical expense by the IRS and is not reimbursed through your health insurance policy can be reimbursed through the FSA. Examples include payments to doctors, dentists, and other medical practitioners; contact lenses, eyeglasses, and hearing aids; deductibles and co-payments on covered expenses; prescription and over-the-counter drugs; and fees for hospital services.

CPAs say if you’re not sure, be conservative in your calculations – you can always increase your FSA contribution the following year.

The Virginia Society of CPAs is the leading professional association dedicated to enhancing the success of all CPAs and their profession by communicating information and vision, promoting professionalism, and advocating members’ interests. Founded in 1909, the Society has nearly 8,000 members who work in public accounting, industry, government and education. This Money Management column and other financial news articles can be found in the Press Room on the VSCPA Web site at

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Dean Knepper, CPA, CERTIFIED FINANCIAL PLANNER™ professional

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