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New Tax Rule Cuts Medical Costs

As the end of the year approaches, it's time to make sure that you've used all the money you put in your flexible spending account -- an account set up through your employer that allows you to pay for out-of-pocket medical expenses with pre-tax dollars.

Traditionally, eligible expenses have included healthcare deductibles, co-payments, vision care, dental care, prescriptions, and similar items. On September 3, 2003, the Treasury Department and the IRS added over-the-counter health care products to that list.

Bonnie Whyte, president of the Employers Council on Flexible Compensation, offers this advice on what is eligible and what isn't, what you should do right now to take advantage of your account, and how best to prepare for next year.


Flexible spending accounts are offered by employers to give employees the option of paying with pre-tax dollars for medical expenses that aren't covered by their insurance.

Employees get to save taxes on the amount of money that they've put in. It's an easy way to save 25 percent or more on healthcare expenses.

FSAs can be used for expenses for medical conditions - deductibles, prescription drugs, LASIK eye surgery, co-payments, dental expenses, and eye care vision expenses.

The over-the-counter items that are now allowed are things related to a medical condition - like antacids, allergy, and cold medications.

Something like suntan lotion is not normally considered a medication, but if a person had skin cancer surgery and is using suntan lotion to prevent a relapse, then it's eligible. However, it wouldn't be eligible for an average person to prevent sunburn.

People should be going to their plan administrators - the people processing your flexible spending accounts. As people are signing up for their spending accounts for 2005, they need to consider what they estimate they're going to be spending next year and choose accordingly. Consider potential expenses like new glasses or LASIK eye surgery.

You need paperwork from a medical professional showing that you have a medical condition in order to prove to your plan administrator that certain items should be covered for you.

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