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If you’re like me, you and/or your spouse have a flex spending account or health care spending account that you put money into, biweekly or monthly. These are great tools if you have anticipated expenses for the upcoming calendar year. For example, if you know you are going to have surgery or a large medical expense like new glasses, new contacts, etc., health care spending accounts or flexible spending accounts are a great way to save a little money. Here’s how it works: Because the money goes into these accounts pre-tax, the contribution is taken from your salary BEFORE it is taxed. Then, when it is paid out to you for eligible expenses, you are not taxed on this money either. It is a great tax shelter but… while that sounds great, read on because putting in too much can come back and bite you a bit as well.

For this calendar year, I overestimated a bit and put in WAY too much. I don’t know whether it was that we have less expenses or just that my new insurance was that much cheaper, but I continued with last calendar year’s amount and it turned out to be too much so as we embark on 2011, I am looking to spend well over $800 before March 15, 2011. Most flex spending accounts give you until March 15, 2011 to incur eligible expenses and they have to be submitted to the company running your Flexible Spending Account by a set deadline. Check with your company because it can be crucial to getting your hard-earned money back!

So how does all this work? Some companies offer a card- so it tracks what you pay in and tracks what you spend too. You get a debit card and you just charge your eligible expenses on that all year long. Many high deductible plans work that way as well. However, MOST companies who offer the flexible spending account require manual enrollment, and your health insurance numbers for paperless reimbursement AND a bank account for automatic deposits. Their websites are chalk full of information and you can track your spending/reimbursements on-line. You have to physically submit a receipt for over-the-counter and eligible items (read on- some OTCs are going away in January 2011 from automatic reimbursement so stock-up now) and then they review the items and pay you back. For example, for costs incurred on eyeglasses, you submit the receipt and you are paid back. For 2010, if you bought Tums, Advil, and cough drops, you have to remember to save the receipt and you get paid back but you have to submit the receipts along with your claim form. It’s a little tedious for working parents and most people in general to collect receipts, copy them, and then send them in manually (fax or postal mail) with their claim form which also has to have a lot of information. Frankly, sometimes it’s a nightmare to submit these! As far as prescriptions, dental and medical visits, if you use your insurance card, then there is generally a paperless reimbursement option so the money automatically appears in your checking or savings account. You have to set that up on-line or when you enroll. So, all in all, that is a painless process if the paperless reimbursement process is working as it should be.

Big change starting January 2011 that you need to be aware of: No more OTC meds like Advil© or its generic equivalent, Tylenol© or its generic equivalent, Tums©, Prilosec, etc., etc., will no longer be reimbursed without a doctor’s note. That’s right folks! If you have a headache and buy Ibuprofen, don’t bother saving the receipt unless accompanying that receipt you also have a doctor’s Rx for that headache medicine. Nice! So, if you are estimating what to put in this year, I would make sure you take out all those OTCs (I approximate AVGERAGE households average about $200 a year) unless you can get a doctor’s note for them. This is a hugechange and many people are re-calculating their costs for the 2011 Calendar Year. Many other things will still continue to require what is called a LETTER OF MEDICAL NECESSITY. These are a hassle too and I have been through a lot to get reimbursements for things my doctor prescribed. For example, if you have a doctor’s note to say buy a humidifier for your allergies, you will sometimes get hassled from the flexible spending account company for buying a more expensive model so you will then need to do a cost comparison and tell them why you bought this humidifier versus some $10.00 model. I kid you not.

So, in sum, there are pros and cons to a little tax savings. While this is a good program and I think people should put in what their estimated costs would be, I would urge you to calculate your spending for this past year and conservatively estimate next year’s because if you put in too much like I did this year, you are at risk for just outright losing that money and then you blow any tax advantage you may have received by putting the money in, in the first place.

With Flex and Health Spending Accounts like all financial accounts, accuracy & diligence is key- I think they are good if you are willing to put in the time to keep great records of your receipts, do the work of sending them in, and also are okay with running around collecting medical necessity letters and OTC Prescription letter if needed. Then you may make out okay. But, if you simply do not want to deal with it, only put in what your estimated true medical/dental/vision costs are for the year – that way you do not have a balance and you definitely do not want to lose the money. Happy Estimating!