Flexible Spending Accounts
A recent trend in the small employer health benefit area is the growing popularity of flexible spending accounts. FSAs, also called flexible spending arrangements, allow employers and employees to use pretax dollars to pay for certain personal expenses that aren't covered by insurance.
There are two types of FSAs: health care FSAs and dependent care FSAs. As the names imply, the former is for reimbursing health care expenses, including any insurance deductibles and co-payments, and the latter is for reimbursing expenses such as daycare or sitter fees.
In an FSA, employees agree to deduct a fixed amount per pay period. These pre-tax dollars are put into an account and then used during the year for reimbursement of certain types of expenses. The great advantage of FSAs is the tax savings. Consider the following example:
EXAMPLE:
You have a $600 dental bill (and no dental insurance). Without the FSA,
you pay the $600 and call it a day. With the FSA, you submit the bill
to your FSA administrator who credits your account and cuts you a check for
$600. The $600 is coming out of your paycheck at a rate of $23 a pay
period (if bi-weekly) before taxes, but only costs you $17 a pay because it
deducted pre-tax. Therefore, the $600 bill only costs you $442.
Basic Rules of FSAs
| An employee must choose how much to put in the account at the beginning of the year. That amount is divided by the number of pay periods and deducted accordingly. |
| If there is a balance left in an individual employee's flexible spending account at the end of the year, it is forfeited (known as the use-it-or-lose-it policy); forfeited funds may be used by the employer to offset future administrative expenses. |
| The plan administrator should allow 90 to 120 days after the end of the year for participants to submit claims for the prior year. |
| The maximum deduction allowed for medical is $5,000 for day care, $5,000. |
| Medical bills are reimbursed as submitted regardless of the amount in your account to cover such bills. |
| Day care reimbursements will not exceed the amount in your account. |