Flexible spending gets more rigid

If you have a health-care flexible spending arrangement (FSA), commonly known as a flexible spending account, through your employer, it's about to become less flexible.

The coming change means you might want to alter your FSA contribution during this year's open-enrollment period for health benefits. New federal regulations that take effect Jan. 1 require a prescription for drugs and medications purchased with FSA money, limiting purchases you can make tax-free.

The same rules apply to health reimbursement arrangements, health savings accounts and the less-common Archer medical savings accounts.

That means no more tax-free purchases of over-the-counter cold and flu medications, pain relievers and allergy meds without a prescription. The prohibition is part of the Affordable Care Act enacted in March.

The good news is the new rule pertains only to drugs and medicines. You can still buy over-the-counter medical supplies.

So, besides such purchases as crutches, medical-testing kits and joint supports, you can still use FSA money for standard medicine-cabinet stock, such as Band-Aids, contact-lens solution and hearing-aid batteries.

Some plans allow the purchase of suntan lotion with a sun protection factor, or SPF, of more than 30 and even hand sanitizer.

Big-ticket expenses such as eyeglasses and dental braces are still allowed. And the new rule specifically exempts reimbursements for the cost of insulin, which you can still buy without a prescription.

If you have an FSA available through your employer, here's what you need to know.

FSAs are still a good deal: An FSA is a benefit typically offered by large employers to help workers defray medical costs not covered by insurance.

You designate a yearly amount to contribute to the FSA. Your employer deducts a prorated amount from each paycheck before taxes. Whenever you pay for an approved medical item, you draw down on your fund of pledged contributions, often with a dedicated debit card.

The account allows you to save money by purchasing health care-related items with pretax money, essentially giving you a big discount. The problem with FSAs is they are "use it or lose it." You must use the FSA money by the end of the calendar year, though many employers extend the deadline into the following year. Otherwise, you forfeit the balance.

Re-evaluate: During open enrollment this year for your company benefits covering 2011, take a critical look at how much money you should commit to your FSA, said Philip Noftsinger, president of the payroll-business unit of CBIZ.

Many plans have online sites that allow you to see previous FSA purchases, he said. How much did you spend in 2010 and 2009 on over-the-counter drugs and medicines? If it's a big dollar amount, you might want to reduce your 2011 pledge to your FSA, but most people should be fine leaving the contribution the same, Noftsinger said.

Stock up: Smart FSA users know to stock up on medicines and supplies to exhaust their FSA fund every year.

This year, use FSA money to stock up on over-the-counter drugs and medicines before Jan. 1. For example, if it's a choice between stocking up on over-the-counter medications or paying a bill for kids' braces that could be paid after Jan. 1, choose the meds, said Rob Wilson, president of outsourcing firm Employco USA, in Westmont, Ill., which helps small businesses set up employee-benefit plans like FSAs.

Even if your employer's plan includes a grace period for FSA spending that spills into 2011, Jan. 1 is still the deadline for using FSA money to buy over-the-counter meds, the IRS says. Don't worry if you aren't reimbursed before New Year's Day. You just have to make the purchase in calendar year 2010.

Get a script: A minor loophole or workaround in the new rule is that you can still buy over-the-counter medications if they're prescribed by your doctor. So the advice is to become less shy about asking doc to whip out his prescription pad. If during an exam she says, "Give the toddler Children's Tylenol," ask her to write a script so you can buy it with FSA money.