A Flexible Spending Account (FSA) is a tax-advantaged account set up through an employer. An FSA allows an employee to set aside a portion of his or her income to pay for qualified health care, or dependent care expenses. Money deducted from an employee's income, for an FSA account, is not subject to payroll taxes, resulting in a substantial payroll tax savings.
There are two different flexible spending accounts available. One is for qualified health care expenses and the other is for qualified dependent care expenses. There is a yearly maximum on the amount of money that can be deferred into an FSA account, which is set by the employer for a health care FSA. The dependent care maximum is $5,000, which is set by the IRS. Both types of accounts can be used concurrently.
An FSA account allows money to be deducted from an employee's income, pre-tax to cover qualified expenses. It is important to note that the money must be spent within the plan year. Any money left unspent at the end of the year is forfeited. This is known as the "use it or lose it" provision. In 2005, Congress passed an optional 2 1/2 month grace period that employers can adopt in their plans, allowing use of the funds for 2 1/2 months after the end of the plan year. The annual contribution amount must also remain the same throughout the year unless certain qualifying events occur, such as birth of a child or death of a spouse.
Tax Savings example: A person in the 28% Federal tax bracket, with a 4% state tax, along with the FICA and Medicare taxes of typically 7.625%, for a total of almost 40%, who has $2,000 deducted and put into an FSA for health or dependent care would result in almost $800 in tax savings. If this example person had not utilized the FSA, they likely would not have been able to deduct this $2,000 expense because it would not have met the 7.5% of Adjusted Gross Income threshold needed to be able to deduct it on their federal tax return. If the same person had $5,000 in dependent care expenses, and put that much into their dependent care FSA, the tax savings would be $2,000.
To assist you in determining the amount you should elect to fund your Health Care Flexible Spending Account, utilize our worksheet.
What expenses can be reimbursed under a Health Care Reimbursement Account?
A Flexible Spending Health Care Reimbursement Account is normally designed to reimburse items such as deductibles, co-payments, dental, hearing, and vision expenses. To determine if an expense is qualified for reimbursement you may search our Allowable Expense Listing. Some plans may also allow reimbursement for certain Over-the-Counter Expenses.
Who is covered and what expenses can be reimbursed under a Dependent Care Flexible Spending Account?
You may be reimbursed for expenses incurred on any child under the age of 13, or any other dependents (including a parent, spouse, or spouse's child) who is physically or mentally incapable of caring for themselves. You can be reimbursed for expenses for which the primary purpose is to assure your dependent's well being and safety. Covered expenses include Dependent Care in someone else's home, Dependent Care in your home or in a child or adult day care center, nursery school expenses, after school programs, and summer day camps.
For Reimbursement Account participants who hold debit cards:
Link to our strategic partner's website to view your claim history and account balance.
Use our FSA Calculator to estimate your annual contribution.
We are pleased to announce that FSA participants will soon be able to use their card more conveniently than ever before, reducing the number of times they have to send in sales receipts after using their FSA Benefits Card.
Effective 1/1/08, the FSA Benefits Card will be able to automatically substantiate many of your over-the-counter FSA eligible expenses through a new process called the Inventory Information Approval System (IIAS) as long as you use your card at a vendor that has implemented this new procedure.
For more information and a listing of participating merchants for 2008, click here.
