Employer-sponsored flexible spending accounts (FSAs) are benefit plan arrangements that allow employees to pay for certain health care or dependent care expenses on a pre-tax basis. Flexible spending accounts offer significant tax advantages. Employees do not pay federal income, state income, or FICA taxes on the salary they contribute to a FSA plan. Employers, in turn, do not pay matching FICA (7.65%) and FUTA taxes because employees’ gross incomes are significantly reduced. FSAs are excellent tools for employees in savings significant tax dollars especially in this day of rising health care costs.
There are two types of FSAs. A Health Care FSA enables you to use pretax dollars to pay for qualified health care expenses which are not reimbursed under any health care plan or insurance plan, while a Dependent Care FSA pays for your qualified dependent/child care expenses. However, FSA funds are not interchangeable. The maximum amount of expenses an employee may be reimbursed for under a dependent care FSA is $5,000 annually ($2,500 for a married taxpayer filing separately). There is currently no statutory limit on the amount of reimbursement employees may receive under a health care FSA. Nevertheless, employers usually set a maximum limit (e.g., $3,000) to protect themselves against major losses under the “uniform coverage” rule, which requires that employers make the full amount of coverage elected under the plan available to employees from the first day of the plan year, regardless of how much they have actually contributed to the account. However, beginning in 2013, a statutory limit of $2,500 will be set.
To maintain a tax-qualified status, flexible spending account plans must comply with special requirements under Internal Revenue Code Section 125. They must also meet some general rules that applies to all cafeteria plans, including written plan, reporting, and record keeping requirements.
(FSAs) are benefit plan arrangements that allow employees to pay for certain health care or dependent care expenses on a pre-tax basis.
In 2011, you will no longer be able to turn in expenses for over-the-counter drugs unless you have a prescription.
What are the Rules for an FSA Plan?
- The choices you make have to be made priorto your effective date on the Plan.
- If you do not have services rendered within the plan year that will allow you to use your spending account funds, you will lose those funds. IRS regulations allow an additional 2 ½ months to spend the funds remaining in your account if permitted by your Plan Document. Any funds left after that period will be forfeited.
- There can be NO change for a Plan Year without a life-changing event. You will have the opportunity to change your elections annually, prior to each year. (Note, your Health Care FSA account can only be changed annually regardless if you have a life-changing event unless specifically permitted by your Plan Document.)
- Life changing events are defined by the IRS as:
- Your marriage
- Your divorce or legal separation
- Birth or adoption of your child
- Death of spouse or dependent
- Termination of your dependent relationship
- Change of job status by you or your spouse
- Significant changes in coverage or premium
- A Qualified Medical Child Support Order (WMCSO)
- Entitlement or Loss of Medicaid or Medicare Coverage
- Change in Residence (out of area)