Flexible Spending Accounts are going to get better in 2005.

For a long time now flexible spending accounts (FSA’s) have helped taxpayers handle things like child care and medical expenses by allowing employees to pay such expenses with tax free dollars. That has made life a lot easer for many people and resulted in tax savings for a great many Americans. (Especially in the area of medical expenses since not many can take advantage of the Sch A medical deduction due to the high exclusion).

A participant in an FSA is currently able to set aside up to $5,000 toward child care and medical expenses and pay for these expenses out of their FSA account. The down side to this system though has always been that any money not spent within the calendar year it was saved was given back to the employer. So if you saved money to your FSA in 2004 you had to spend it in 2004 or you lost it. This use it or lose it rule in has always made figuring out what to withhold kind of tricky. Save too much and you loose it back to your boss with no benefit to you at all (ouch) save too little and you had to pay the expenses out of your after tax dollars (ouch again).

Well there’s good news for people who use flexible spending accounts regarding this matter.

The have loosened up what they call the grace period and made it a little farer as regards the time you have to spend the money. Beginning in 2005 and there after you will have up to March 15th of the year following the contribution to your FSA to use the money.

That extension of the grace period has only one down side. Your EMPLOYER not you must ask that it be extended as part of their plan provisions. I can’t imagine that any employer would not do so but some might. I suppose if they get back a lot of money because employees are withholding too much it might cost them but other wise it’s of no difference to them. But you do need to check with your benefits, payroll, or HR department, depending on who handles your FSA program, and see what you employer plans on doing.

If they don’t say that it’s in the works and will be available to you for 2005 do a little lobbying. It never hurts to put a little pressure on to be sure such things get done. Kind of like the Roth 401k program I spoke about a while back. Don’t forget to see if your employer is going to start it on Jan 1st as well. You can easily lobby for both changes at the same time since they are going to be administrated by the same department.