It's Your Money, Don't Lose It

Dec. 27, 2004 -- -- Flexible savings accounts are a great Band-Aid when it comes to health care costs, covering extras your co-pay leaves out. But if you're one of the 7 million Americans who have one, there are important things you need to know before the year ends and you lose money.

Approximately 7 million Americans are enrolled in flexible spending accounts, contributing an average of $1,000 per year, according to research by the Employer's Council on Flexible Compensation. As this year comes to a close, if you have any money left in your FSA, be sure to spend it before Dec. 31; otherwise, you forfeit the remaining funds. Approximately 3 percent of FSA money is forfeited each year for a total of $210 million, according to Mercer Human Resource Consulting. Although employers are the beneficiaries of this unspent money, they gain very little from it. Typically, employers use forfeited money to cover the administrative costs as well as any losses associated with offering FSAs.

FSAs are an additional, tax-advantaged method to help you cover health care costs that your insurance does not cover. FSAs permit employees to contribute up to $5,000 in pre-tax dollars to an account established specifically to pay for medical expenses. Although plan policies will vary from employer to employer, covered expenses typically include eyeglasses, contact lenses, contact lens cleaning solution, hearing aids, birth control, dental work (not including cosmetic), co-payments for prescription drugs and doctors visits, as well as many over-the-counter medicines, such as antacids, allergy medicine, cold medicine and pain relievers.

According to the Employee Benefit Research Institute, approximately 75 percent of large employers offer FSAs, but research by Mercer indicates that only 20 percent of workers offered FSAs actually used them in 2004. If you are part of the 80 percent not taking advantage of this benefit, you are missing out on significant savings. Paying health care costs through FSAs can reduce an employee's tax bill by 30 cents to 40 cents for every dollar contributed to the plan. Additionally, an employee in the 25 percent tax bracket can save up to $325 in federal, Social Security and Medicare taxes for every $1,000 contributed, according to EBRI. One of the major reasons cited for not taking advantage of an FSA is that any money left at the end of the year is forfeited. However, the average forfeited amount is just $30 a year and because of the new inclusion of over-the-counter medications this year, most employees will forfeit even less moving forward. Another gripe about FSAs is that they require a lot of record-keeping in that you need to submit your receipts for eligible expenses. The good news is that many plans are now offering flexible spending debit cards, which automatically withdraws the money from your account eliminating the need for receipts. In addition, many drug stores make the process of tracking eligible expenses easier. For example, CVS pharmacy customers who use an ExtraCare loyalty card can track their purchases on CVS' Web site. As such, these disadvantages hardly outweigh the overarching advantages offered by FSAs.

If you have unspent dollars left in your flexible spending accounts, now is the time to take action. Check with your plan administrator to see exactly how much you have left and then determine which items you can purchase before the end of the year.

1. Year-End Medicine Cabinet Check: Open your medicine cabinet and go through all of your over-the-counter drugs and check for expiration dates. Take note of any items expiring in the next few months and add them to your shopping list. You also should review your prescriptions and see if there are any you can stock up on before the year end, without being penalized by your insurance company for early refills.

2. The "Eyes" Have It: Although you may not be thinking about sunglasses at this time of year, if you wear prescription sunglasses and left yours at the beach this summer, order a new pair before Dec. 31. Remember, you do not need to have them in your hands before the end of the year, you simply need to pay for them. Additionally, order your replacement contact lenses now. Contact lenses qualify and are items that you will definitely put to use.

3. Take a Tally: If your plan does not offer an FSA debit card, review your expenses over the year to ensure you have included all eligible expenses.

4. Pre-Pay: Like with your mortgage payment, if you are paying for dental work in installments, see if you can pay the January installment in December.

Mellody Hobson, president of Ariel Capital Management (arielmutualfunds.com) in Chicago, is "Good Morning America's" personal finance expert. Ariel associates Matthew Yale and Aimee Daley contributed to this report.