Fall Benefit Check-Up – Flexible Spending Accounts

Flexible Spending Accounts (FSA) are becoming more popular as consumers take advantage of the increased savings. Employees can set aside a little money each pay period to cover bills incurred throughout the year. Typically spending accounts are offered to assist with either health care costs or child care costs, and some companies offered both accounts.

How Plans Work

During your benefits enrollment period, you choose a dollar amount to deduct from your paycheck to fund the account. There are a few key benefits which make these funds particularly valuable:

  • Pre-tax deductions reduce taxable income and give you more buying power for your money. In exchange all funds must pay for either medical costs or child care, depending on the account.
  • No waiting period. You get the benefit of your annual contribution at any time during the year. You will have access the full amount of your yearly determined total on the first day of eligibility.
  • Lots of flexibility to cover needed costs. A medical FSA can pay for braces, deductibles, co-pays, prescriptions, and even some over the counter medicines. Child care can cover day care, after school, and in some cases, summer camps.

Considerations When Using a Flexible Spending Account

Although recent tax law changes enable some plans to roll over funds to the next calendar year, many still operate under “use it or lose it” rules. Employees lose any remaining balances at the end of the year. Under the new rules, you can roll up to $500 over to the next year for employers offering the new benefit. Other FSA accounts give employees a grace period of 2 ½ months into the new benefit year to use the money.

Impact on tax credits. Using and FSA account to pay for day care eliminates the child care tax credit because you have already received a benefit. There may also be an impact the tax deductibility of healthcare costs due to the FSA tax benefits. FSA contributions can also impact your ability to contribute to a Healthcare Savings Account (HSA). Your tax advisor can help you determine which route will offer the highest benefit.

FSA Alternatives

Any company which offers a qualifying, high deductible health plan, allows employees to contribute to Health Savings Account or HSA. Like an FSA, you can have a pre-determined amount sent to your HSA account each paycheck. The deposit is pre-tax and available for doctors’ visits, prescriptions, dental and other unreimbursed health care costs. HSA accounts roll over each year and never expire. They are also available independent of employers so you can take it with you if you change jobs.

A high deductible policy is any policy with an annual individual deductible of $1,300 and a family deductible of $2,600 or higher. Out of pocket maximums cannot exceed $6,550 for an individual and $13,100 for a family. In addition to the higher limits, you cannot have coverage through another health plan (such as your spouses). You may not be a dependent on another tax return (including eligibility). Those enrolled in Medicare also do not qualify.

Those with medical and child care expenses often benefit from taking advantage of FSA accounts offered through employers. They help spread your costs over the course of the year and increase the value by using pre-tax dollars.