Using a Flexible Spending Account to Cover Family Medical Expenses

As my grandsons' legal guardian, can I use my flexible spending account to pay for their braces

—H.P., via e-mail

Paying for orthodontia, which can run several thousand dollars, is a good use of money in a pretax flex­ible spending account. Typically, grandparents who are legal guardians of their grandchildren can use the money they contribute to FSAs to cover their grandkids' out-of-pocket medical expenses, says Jody Dietel, chief compliance officer for WageWorks, which administers FSA plans. But you must check your employer's rules. Some plans, for ex­ample, limit eligibility to children, foster children and stepchildren, Dietel says.

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As long as the boys are cleared for coverage, you can plan how best to funnel the FSA money toward braces, retainers and other appliances. First, ask your orthodontist how much the total expense will be for both boys. You may be able to negotiate a discount for treatment of two children or by offering to pay in full upfront. If you can't afford to pay all at once, ask whether a payment plan is available -- for example, a 25% down payment and 18 to 24 monthly payments thereafter. If you have dental insurance, find out whether it has orthodontic benefits.

Stretch your benefits. Starting in the 2013 plan year, the federal government is restricting the annual employee contribution to an FSA to $2,500 (previously, employers set contribution limits for their workers). But families can stretch those benefits because the maximum applies per employee per plan -- not per tax return or household. So if both spouses have jobs, each may set aside $2,500, for a total of $5,000, and use the money to cover out-of-pocket medical expenses for themselves, each other and any qualifying family members, which usually include children.

Even though families may be able to stuff less pretax money in an FSA than in previous years, there could be a silver lining: Because the amount employees can shelter from taxes in FSAs is now capped at a lower level, the IRS is considering scrapping the "use it or lose it" rule, which requires employees to forfeit the funds if they don't empty their accounts before their employer's deadline.

But until the feds take action, think about how you can maximize your FSA under the current rules. Many employers offer a grace period of two and a half months after the plan year ends -- usually until March 15 -- to use the money. In the case of the grandkids' braces, if your FSA has a grace period, you still have time to spend leftover 2012 funds plus your 2013 money toward orthodontia. (You can use the full year's worth of FSA funds anytime within the plan year, even if all the con­tributions haven't yet been withdrawn from your paychecks.)

Or, if orthodontia for one or both of the children can wait until next year, you could combine maximum contributions from 2013 and 2014 to cover a $5,000 payment during the grace period in early 2014. If the plan has no grace period, you could ask your orthodontist whether you could pay one installment at the end of 2013 and another in early 2014. Aligning the boys' treatment over three calendar years starting in 2013 could also help stretch your funds. For more on FSA planning, see www.savesmartspendhealthy.com.