Flexible Spending Account (FSA)
What Is a Flexible Spending Account?
A Flexible Spending Account (FSA), also referred as a flex plan or reimbursement account, is an employer-sponsored benefit that allows you to pay for eligible medical expenses on a pre-tax basis (there are also similar accounts for dependent and child-care expenses).
If you expect to incur medical expenses that won't be reimbursed by your regular health insurance plan, you should be taking advantage of your employer's FSA if one is offered.
How Does a Flexible Spending Account Benefit Me?
An FSA saves you money by reducing your income taxes. The contributions you make to a Flexible Spending Account are deducted from your pay BEFORE your Federal, State, or Social Security Taxes are calculated and are never reported to the IRS. The end result is that you decrease your taxable income and increase your spendable income. You can save hundreds of dollars a year.
How Does a Flexible Spending Account Benefit my Business?
You have the opportunity of saving hundreds or even thousands of dollars on the 7.65% employer match since employee elections are taken out of pay on a pre-tax basis.
How Do Flexible Spending Accounts Work?
At the beginning of the plan
year (which usually starts January 1st), your employer asks you how much
money you want to contribute for the year (there are limits).
You have only one opportunity a year to enroll, unless you have a qualified "family
status change," such as marriage, birth, divorce, or loss of a spouse's
insurance coverage. The amount you designate for the year is taken out of
your paycheck in equal installments each pay period and placed in a special
account by your employer.
As you incur medical expenses that are not fully covered by your insurance, you submit a copy of the Explanation of Benefits or the provider's invoice and proof of payment to the plan administrator, who will then issue you a reimbursement check or utilize the Mastercard that has been issued to you to make payments at point of service without having to wait for reimbursement.
What Expenses Are Eligible for Reimbursement?
Any expense that is considered a deductible medical expense by the Internal Revenue Service and is not reimbursed through your insurance can be reimbursed through the Flexible Spending Account. Examples include:
- Fees paid to doctors, dentists, surgeons, chiropractors, psychiatrists, psychologists, and Christian Science practitioners Contact lenses and eyeglasses
- Fees for hospital services, qualified long-term care services, accident and health, and qualified long-term care insurance premiums, nursing services, laboratory fees, prescription medicines and drugs, and insulin.
- Acupuncture treatments
- Inpatient treatment at a center for alcohol or drug addiction
- Smoking-cessation programs and prescribed drugs to help nicotine withdrawal
- False teeth, hearing aids, crutches, wheelchairs, and guide dogs for the blind or deaf
- Fees in excess of reasonable and customary amounts allowed by your insurance
- Cost of vasectomies, hysterectomies and birth control
- Non-elective cosmetic surgery
- Co-payments on covered expenses
- Deductibles
- Braces
- Prescription drugs or prescription co-pays
How Do I Decide How Much to Contribute to My Flexible Spending Account?
It's important to give some thought into calculating how much money to contribute for the year, because if you put in more money than you need, by law, you lose it. You have three months after the end of the calendar year to submit claims for eligible expenses incurred during the previous calendar year. Any money left in your account after the three months will be forfeited.
To determine how much to contribute, make a list of the expected out-of-pocket
medical expenses for you and your dependents for the next year. For example,
if you always exceed your deductible, include the deductible amount in your
calculation. Be conservative so you don't risk forfeiting any money.
FSA Rules & Discrimination Testing:
Purpose of Discrimination Testing: To encourage the establishment of FSA plans for all employees rather than a select few.
Eligibility: The wait for eligibility cannot be longer than 3 years & cannot discriminate in favor of highly compensated employees.
Contribution & Benefit Test: Key employees cannot receive more than 25% of the non-taxable benefits
Dependent Care (2 Tests):
- Average Benefit Test: the average benefit for non-highly compensated equal 55% of the average benefit for highly compensated
- 5% shareholders & owners cannot receive more than 25% of the total Dependent Care Benefit.
Rules:
- Partners of a partnership and Owners in an S corporation cannot participate, nor can their spouse or children.
- If you do not use your election by the end of the plan year the forfeited money is retained by the employer.
- A claim can be paid for the whole annual election at any time in the plan year for the Flexible Spending Account.
- Dependent Care Account claims can only be paid for the amount of money deposited in the account at that time.
- Key Employees can only use 25% of the total benefits (collectively).
- Premiums can be changed during the plan year when the renewal for the Health Insurance is at a different time than the open enrollment for the Flexible Spending Plan. (Only if the carrier remains the same)
- You can only change elections in the Medical Spending Account and Dependent Care Account if you have a life status change:
- Birth or Adoption of a child
- Death of dependent or spouse
- Change from part time to full time employment of you or your spouse (or vise versa)
- Change in marital status
- Filing of form 5500 and Schedule F are required for all FSA plans. They are due seven months after the end of the plan year.
- There are some ineligible expenses such as teeth whitening and fitness related expenses. (Check with the www.irs.gov for a complete listing of ineligible as well as eligible expenses.)
