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 Slightly less flexible: Why doesn't my FSA pay for cold medicine?

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It's cold season (already) and I needed Nyquil, Dayquil and cough drops. But when I took out my Flexible Spending Account debit card to pay for them, as I had in past years, the transaction was rejected. The store manager told me that health FSA rules had changed in 2011, and the cold medicines (along with lots of other items) no longer qualified. Somehow, that important bit of information had slipped by me.

What happened?

Flexible Spending Accounts, offered by many employers, allow you to set aside a certain amount of money each year (once $5,000, now $2,500) tax-free to pay for out-of-pocket medical expenses. "Tax-free" is always good, and an FSA could potentially save you hundreds of dollars in payroll taxes.

There is a downside, though: If you don't spend the money, you forfeit it. And it's hard to predict how much you'll spend on medical expenses in any given year.

When I first signed up, FSAs had an easy "escape hatch": They covered items like cold remedies and anti-itch ointments and motion sickness medicine, so you could spend down your account at the end of the year by stocking up on whatever you needed.

No more. In 2011 the Affordable Care Act shrank the list of FSA-eligible items considerably, eliminating many over-the-counter medicines (unless your doctor provides you with a prescription for them). And since I've still got a little under $100 to spend by the end of 2012, I have to figure out new ways to use it up.

A recent AP article offered advice on that front. Here are some of its suggestions: 1) Spend it on co-pays by
scheduling a checkup with your doctor, dentist, optometrist, etc. by the end of the year; 2) Buy spare pairs of
eyeglasses, contact lenses, etc. since those are still FSA-eligible; 3) stock a first-aid kit with FSA-eligible items like thermometers, bandages and pain relievers.

For more information about current FSA rules, go to this IRS FAQs site.

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