What is an FSA?
So what exactly is an FSA and how can workers maximize their advantages that they can derive from it?
Flexible spending accounts were created as part of the Internal Revenue Code Section 125. It is an account where you put in money from your pre-tax salary that is before you pay tax on your salary. This money you can use for health care for which you have to bear the costs and other dependent care expenses.
Let us simplify it further. Let's suppose that you get $1,000 on your designated pay date from which you put $20 in FSA. The taxes you pay will not be on $1,000, but on $980 per pay date. So you have already saved money. This money will be reimbursed to you when you submit timely claims for eligible expenses. You are actually saving money on the service and products that you are spending your hard earned money on. Things like over-the-counter medicines, medical expenses that your regular insurance does not cover, child care and adult care expenses, you are already paying for them.
Still there are a lot of questions that baffle employees and I will try and unravel them for you.
Medical FSAs And Dependent FSAs
How do flexible benefits work? There are two varieties of FSAs, the medical FSAs and the dependent FSAs. With the former, you put aside, every year between, January and December, money to cover your cover your FSA-eligible medical, dental and vision out-of-pocket costs, which your regular income does not cover.
This neat little package the employer will pay back to you, as and when you need it, for expenses that you have borne and for which you are eligible to be reimbursed under FSA. However, the employer sets a limit to the amount you can set aside in a medical flexible spending account. Typically, the amount vacillates between $2,500 and $5,000.
Coming to a crucial point, that I recommend you read twice, to understand its worth. If you have asked your employer to put away $3,500 and in January a $3,500 qualified expense crops up, as per the FSA program the employer has to reimburse you for the entire amount, irrespective of how much you have put into the account so far. You may have put in just one-tenth of the $3,500, or $350 into the account. If for some reason you decide to leave the company, the employer cannot recover the remaining $3,150 from you.
The latter or dependent FSAs are somewhat different. Dependent FSAs are used to pay for childcare or adult dependent care expenses that are necessary to allow you and your spouse, if married, to work, look for work or attend school full-time.
The maximum limit is set, not by the employer, as in the medical FSAs, but by the federal government. The limit is set at $5000. Many a time that amount is insufficient to cover child-care expenses so individual employees may also be allowed a portion of a tax credit.
Each worker has problems that are different and a generalization of suggestions may not be appropriate here. Speak to your tax advisor and ask him, which is the better option, to participate in the dependent FSA or to just take the allowable tax credit. Your income level is crucial to the decision.
The annual amount that you have chosen to place into your dependent-care account is divided among your paychecks for the entire year and reimbursement for your expenses will be limited to the money that has been deducted from your paychecks.
The major drawback in this FSA is that you have to pay your daycare provider, out of your own pocket and then file for reimbursement, for the amount that you are eligible, that is, the amount taken out of your paycheck so far. Paying first and then waiting for that money to be returned can be a little difficult for those who are short on money
Should All Employees Across The Board Participate?
Another question that often crops up is that should all participate in FSAs or are there any who shouldn't participate in a flexible health spending account? Improbably, the answer to that question is, yes. People who are close to retirement age and already paying a large health insurance premium should consider how, paying a portion of your health insurance premiums via payroll deduction with pretax dollars, will impact their Social Service benefit. Employees on the verge of requirement, who have two to three years of active service left, will be well advised to seek expert advice on whether they should take a pretax salary reduction.
Why Is It Referred To As A "Use It Or Lose It" Account?
People in every day lingo, call flexible spending accounts "use it or lose it" accounts. There is a simple explanation for that. You are saving for an expense that you think that you will surely spend. However, if by the end of the following year, you have not had to incur those expenses, you kiss your money goodbye - you don't get it back. Say for example you thought you'd spend $ 5,000 but spent only $3000, the balance is gone.
Once you decide on the amount you intend to put into the account, you cannot change it. You have to put in that much. However, there are certain stipulations that allow you to change the amount. These include marriage, the birth or adoption of a child, divorce, passing away of a spouse and similar life events. Barring this you have locked yourself into your committed amount.
Who Gets The Leftover Money?
The question that logically arises is where does the leftover money go? It goes to the employer who can use it to balance administrative expenses.
How Much Is Enough?
One lesson that this will teach us, is that we have to be extra careful in determining the amount that we should put into the flexible spending account. How much should it be?
To determine that, write down the qualified expenses you are sure that you and your family are surely going to incur. This should include medication. Also keep in mind that if your spouse also has any insurance or flexible spending account, what you put into the FSA will be a shared responsibility and you don't really have to invest too much individually.
What If We Fail To File By December 31?
This brings us to our last question. What happens if you fail to file for expense reimbursement by December 31? You are normally allowed a 90 days grace period, from December 31 to March 15 of the following year. The intention behind this grace period is to ensure that employees don't forfeit any of the funds that they have deposited in FSA accounts and that eligible expenses can be incurred and reimbursed.
Final Admonitions
Two things, why delay? There can be no convincing reason for this procrastination. And remember that your election money will lapse each year, it will not roll over into the next year, so don't forget to make a new election each year.
