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Mary Beth Franklin: How to beat the new flex account cap

Overlapping grace period can stretch health-care dollars

Jan 16, 2013 @ 10:49 am

By Mary Beth Franklin

One of the changes to 2013 tax rules is a new limit on how much workers can stash in their tax-deferred flexible spending accounts.

In the past, there was no statutory limit, but many employers allowed workers to contribute up to $4,000 per year in pre-tax dollars to their flex accounts to pay for out-of-pocket medical expenses. Starting this year, healthcare flex account contributions are capped at $2,500.

The new limit on flex account contributions will boost taxes for many workers as flex accounts escape not only state and federal taxes, but Social Security payroll taxes as well. (Workers are already feeling the sting of higher taxes as a result of the 2% payroll tax holiday that expired at the end of 2012). The $2,500 annual flex account contribution limit applies only to health care accounts, not dependent care accounts.

But there is a clever way for workers to stretch their health care dollars. Many employers have adopted the two-and-a-half month grace period, allowing workers until March 15, 2013 (rather than the old December 31 deadline) to spend their 2012 flex account balance. If they don't spend the money by the deadline, workers must forfeit the unused dollars

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What many people don't realize is that they can combine leftover funds in their 2012 account with their full flex account allocation for 2013 to pay for out-of-pocket healthcare costs incurred between January 1 and March 15, 2013. (Even though the bulk of those 2013 flex account have not yet been deducted from their paychecks, employees are free to tap the full amount allotted for the year.)

It could be a golden opportunity to schedule and pay for pricey out-of-pocket medical procedures such as Lasik eye surgery or orthodontia. For someone in the 25% federal tax bracket who pays 5% state income taxes and the 7.65% FICA tax, a $2,500 FSA contribution to a health care flexible spending account shaves their combined tax bill by $941.25.

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