Flexible Spending Account (FSA) FAQs
What is a Flexible Spending Account (FSA)?
A flexible spending account (FSA) is an employer-sponsored plan that allows you to deduct dollars from your paycheck and deposit them into a special account that’s protected from taxes. FSA accounts are exempt from federal taxes, Social Security (FICA) taxes and, in most cases, state income taxes. The money in an FSA can be used for eligible health and/or dependent care expenses that are incurred while you are participating in the plan.
Flexible Spending Account Basics
What types of flexible spending plans are there?
There are 3 types of flexible spending account plans:
Health Care FSA: Covers medical, prescription, dental and vision expenses
Dependent Care FSA: Covers dependent care expenses including daycare, nursery school and day camp for children, and services for adult dependents who cannot care for themselves
Limited Health Care FSA: Covers dental and vision expenses only (for compliance with a health savings account)
When does my flexible spending account become effective?
Your flexible spending account or FSA becomes effective on the date you enroll. Unlike other plans, an FSA does not start on your hire date. Contributions to your account begin as soon as administratively possible after you enroll.
How do I participate in an FSA?
To participate, you must enroll shortly after your hire date, or elect to participate during annual Open Enrollment. If you have a life event change (for example, birth or adoption of a child), then you may be able to enroll without waiting for annual Open Enrollment, if you enroll within 31 days of the change.
Who can put money in my FSA?
You and your employer can put money in your FSA, although employers rarely contribute to their employees’ flexible spending accounts.
Who qualifies as an eligible dependent for purposes of the Daycare FSA?
An eligible dependent is any dependent for which an employee pays a provider to care for him/her while they are at work or looking for work. The dependent must be under the age of 13 or incapable of taking care of themselves and live in the employee’s home for more than half of the year.
Flexible Spending Account Expenses
What does it mean to incur expenses?
The IRS considers expenses to be “incurred” at the time you receive medical care or dependent care–not when you are formally billed or actually pay for services. Only eligible expenses you incur within the plan year, including any employer-allowed grace period, are eligible for reimbursement.
How often can I request reimbursements from my flexible spending account (FSA)?
Reimbursements from your flexible spending account (FSA) can be requested as often as you incur a qualified expense. Expenses must be incurred during the plan year and the reimbursement must be requested before the end of the run-out period (or grace period if applicable).
What happens if I have money remaining in my account at the end of the year?
On October 31, 2013, the U.S. Department of Treasury changed the policy on remaining funds in flexible spending accounts. You are now able to roll over remaining flexible spending account (FSA) funds into your next plan year up to $500.00 if your employer allows. This rollover means participation in an FSA is much less risky. This gives you more flexibility to spend your FSA money when you need it. You can use it for necessary out-of-pocket healthcare expenses, rather than feeling pressured to shop last minute and potentially spend unnecessarily at the end of the year.
Can I change my election or stop contributing money to my FSA at any time during the plan year?
Federal regulations state that once you have enrolled in an FSA, you cannot change your election amount unless you have a qualifying life event. Your employer can give you a list of permitted change events.
How much will I really save in taxes by contributing to an FSA?
Generally, contributions you make to your FSA are not subject to federal or social security taxes. In most instances, there are no state taxes taken out either. The amount you may save depends upon:
• The amount you put into your FSA
• The tax percentage you would normally pay on that money (tax bracket)
Let’s say you want $2,000 taken out of your paycheck this year to put into your FSA. The money you direct to your FSA is taken out of your check before taxes are taken out. That reduces your taxable income by $2,000.
Let’s say you normally pay 30 percent in federal, social security and state taxes on your income. In this example, you would enjoy a tax savings of 30 percent of the $2,000. In other words, you could get a $600 tax savings on the $2,000 you directed to your FSA. Plus if allowed, the new rollover feature assures that any unused balance up to $500 will still be there for you in the next plan year.