What are Flexible Spending Accounts (FSAs)?
A Flexible Spending Account or FSA is a tax-advantaged benefit program established by an employer for their employees. This consumer driven account allows employees to use pre-tax money for eligible Section 213d healthcare and dependent care expenses. Based on their needs, employees may elect up to $2550 (per participant) of their annual salary for healthcare and $5000 (per household) for dependent care expenses to be placed into an FSA on a pre-tax basis. There are three different types of accounts that can be offered by an employer through this program a Healthcare FSA, a Dependent Care Spending Account or a Limited Purpose FSA.
How Does an FSA Work?
The total employee election for an FSA is divided by the number of pay periods and deducted on a pre-tax basis from the employee’s paycheck. As a result, the employee’s taxable income is reduced by the election amount and therefore reduces the amount of taxes the employee will have to pay. Employers also save in payroll taxes for every dollar an employee elects, which results in a mutually beneficial program.
What is a Healthcare FSA?
Healthcare FSAs allow employees to pre-tax up to $2,550 (per participant) of eligible expenses. The FSA monies set aside by the employees are then reimbursed to the employee throughout the plan year as the eligible healthcare expenses are incurred, submitted and verified by the plan administrator. FSA eligible expenses include doctor visit co-pays, prescription co-pays, vision care, dental expenses and more.
Click here to download a complete listing of FSA eligible expenses.
In the case of Healthcare FSAs, another benefit of this program is that all funds are available on day 1 of the plan year. This means employees do not have to wait for these funds to accumulate in their account to submit claims.
How Does a Healthcare FSA Work?
Example: Zoe elects $1,000 for the Healthcare FSA plan year that starts on January 1, 2017, and has 24 pay periods in the year. She will see a pre-tax deduction in each paycheck of $41.67.
Zoe and her daughter Amy visit the eye doctor to order new contacts and glasses for a total cost of $1,000 on January 2, 2017. Even though the first deduction of $41.67 will not be taken out until the first paycheck issued on January 15, 2017, Zoe can submit a claim on January 2, 2017 to the FSA administrator with documentation and be reimbursed for the full $1,000. The payroll deductions will continue to take place after the reimbursement as scheduled throughout the year to make up the $1,000 FSA reimbursement that she received.
In addition, Zoe’s taxable income was reduced by $1,000 and she is in the 25% tax bracket. So, she will save approximately $250 in taxes by participating in this program. Plus, Zoe and Amy were able to get the services at the time they needed them because an FSA allows the first day access to funds.
What is a Dependent Care Spending Account?
Dependent Care Spending Accounts allow employees to pre-tax up to $5,000 (per household) of eligible expenses. The expenses must be for the care of dependents claimed on the employee’s federal tax return, which live with the employee and incurred while the employee is at work. Most commonly the account is used to reimburse daycare expenses for children under the age of 13. But, it can also apply for children of any age that are physically or mentally incapable of self-care. In addition, adult daycare for senior citizen dependents is also eligible as long as they are claimed as a dependent on the employee’s federal tax return.
Dependent Care Spending Accounts are funded the same way as a Healthcare FSA, but are reimbursed slightly differently. In order to reimburse FSA eligible expenses, the employee must have the funds available in the account.
How Does a Dependent Care Spending Account FSA Work
Example: Zoe elects $5,000 for the Dependent Care Spending Account FSA plan year that starts on January 1, 2017, and has 24 pay periods in the year. She will see a pre-tax deduction in each paycheck of $208.33.
Zoe’s daughter Amy goes to before-and-after school care while she is at work at a cost of $100 per week. Zoe incurs an eligible $100 expense the first week of January that she pays for on January 7, 2017. However, she must wait until after her first deduction of $208.33 is taken on January 15, 2017 to submit her claim to the FSA Administrator for reimbursement. Moving forward, Zoe can reimburse herself after the eligible expense has been incurred as long as there are funds available.
In addition, Zoe’s taxable income was reduced by $5,000 and she is in the 25% tax bracket. So, she will save approximately $1,250 in taxes by participating in the Dependent Care Spending
What is a Limited Purpose FSA
In cases where an employee has a High-Deductible Health Plan (HDHP) and Health Savings Account (HSA), a Limited Purpose FSA Healthcare may be established. Like a Healthcare FSA, this account allows employees to pre-tax up to $2,550 (per participant) of eligible expenses. However, Limited Purpose FSA eligible expenses are “limited” to reimburse dental and vision expenses. At the employer’s discretion, eligible medical expenses incurred after the deductible may also be reimbursable.
As in the case of Healthcare FSAs, another benefit of the Limited Purpose FSA is that all funds are available on day 1 of the plan year. This means employees do not have to wait for these funds to accumulate in their account to submit claims to the FSA administrator.