Flexible Spending Accounts

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Introduction:

A Flexible Spending Account (FSA) is an IRS approved account used to pre-fund anticipated, eligible medical services, medical supplies and dependent care expenses normally not covered by insurance. Employees can participate in a Medical Expense FSA, Dependent Care FSA or both.

A Medical Expense FSA may be used to reimburse eligible expenses incurred by the participant, their spouse, their qualifying child or qualifying relative; whereas a Dependent Care Flexible Spending Account allows reimbursement for eligible dependent care expenses for qualifying individuals.

Medical Expense FSA funds are available as one lump sum at the beginning of an employer’s plan year. Dependent Care funds become available as they are deducted from the participants paycheck. The funds for both Medical and Dependent Care FSAs are deducted from the participant’s regular paycheck before federal and state taxes are calculated.

With any FSA, participants benefit have less taxable income in their paychecks, which means more spendable income to use toward eligible medical and dependent care expenses and lower taxes at tax time.

Savings Chart:

By using an FSA to pay for anticipated expenses, the tax savings converts to spendable income. That's a potential annual savings of $1,132!

* Based upon a 22.65% tax rate (15% federal and 7.65% Social Security) calculated on a calendar year.

Medical FSA:

A Medical Expense FSA (MFSA) is used to pay for eligible medical expenses, incurred by the participant, their spouse or a qualifying child or relative (defined below). The full amount a participant selects to contribute over the course of the year is available to use at the beginning of the plan year, meaning they don’t have to wait for the money to accumulate before using it.

The maximum contribution amount varies by employer. While there is no IRS limit on MFSAs, employers generally limit the maximum annual amount each employee may contribute. Employers set limits typically to reduce their pre-funding responsibility – if an employee leaves or is terminated and thus no longer pays into the plan, the employer does not retain the pre-funded MFSA dollars.

It is important to budget appropriately when selecting an amount to contribute to an MFSA. Any funds that are left over in the account at the end of the plan year cannot be carried over to the next year or refunded. There is an IRS permitted grace period, and some employers offer a run-out period as well, which creates an extended period for filing claims and/or using funds beyond the plan year. Claims submitted during these extended periods must be for services incurred during the same plan year.

Purchases with an MFSA must be for treatment or prevention of a specific medical condition; this can be as significant as diabetes or pregnancy, or as minor as a skin cut. Certain items cannot be purchased using an MFSA, see the list below for some examples of eligible and ineligible expenses.

Partial List of Medically Necessary Eligible Expenses:

• Acupuncture
• Ambulance service
• Birth control pills and devices
• Chiropractic care
• Contact lenses (corrective)
• Dental fees
• Diagnostic tests/health screening
• Doctor fees
• Drug addiction/alcoholism treatment
• Drugs
• Experimental medical treatment
• Eyeglasses
• Guide dogs
• Hearing aids and exams
• In vitro fertilization
• Injections and vaccinations
• Nursing services
• Optometrist fees
• Orthodontic treatment
• Over-the-Counter Medicine
• Prescription drugs to alleviate nicotine withdrawal symptoms
• Smoking cessation programs/treatments
• Surgery
• Transportation for medical care
• Weight-loss programs/meetings
• Wheelchairs
• X-rays

Partial List of Ineligible Expenses:

• Insurance premiums
• Vision warranties and service contracts
• Cosmetic surgery not deemed medically necessary to alleviate, mitigate or prevent a medical condition

An MFSA may be used to reimburse eligible expenses incurred by:

• Participant
• Participant’s spouse
• Participant’s qualifying child, or
• Participant’s qualifying relative.

A qualifying child must not be someone else’s qualifying child and:

• Is a U.S. citizen, national or a resident of the U.S., Mexico or Canada
• Have a specified family-type relationship to the participant
• Live in the participant’s household for more than half of the taxable year
• Be 18 years old or younger (23 years, if a full-time student) at the end of the taxable year and
• Have not provided more than one-half of their own support during the taxable year.

A qualifying relative must be a U.S. citizen, national or a resident of the U.S., Mexico or Canada and:

• Have a specified family-type relationship to the participant, are not someone else’s qualifying relative and receive more than one-half of their support from the participant during the taxable year or
• If no specified family-type relationship to participant exists, are a member of and live in participant’s household (without violating local law) for the entire taxable year and receive more than one-half of their support from the participant during the taxable year.

There is no age requirement for a qualifying child if they are physically and/or mentally incapable of self-care. A qualified child of divorced parents is treated as a dependent of both, so either or both parents can establish a Medical Expense FSA.

Dependent Care FSA:

A Dependent Care FSA (DCFSA) is an excellent way to pay for eligible dependent care expenses such as after school care, baby-sitting fees, daycare services, nursery and preschool. While most commonly used for childcare, it can also be used for adult day care for senior citizen dependents that live with the participant, such as parents or grandparents. It cannot be used for summer camps (other than "day camps") or for long term care for parents that live elsewhere (such as in a nursing home). Eligible dependents include the participant’s qualifying child, spouse and/or qualifying relative.

The DCFSA has a $5,000 federal limit on the maximum contribution amount per plan year (certain exceptions and rules apply to this limit). Married spouses can each elect to have this amount deducted from their paycheck and applied to expenses. However, at tax time all withdrawals in excess of the $5,000 are taxed. Unmarried couples can deduct and use $5,000 each.

For a DCFSA –

Minimum Annual Deposit: Determined by employer

Maximum Annual Deposit: Depends on participant’s tax filing status 

• If married and filing separately, the maximum annual deposit is $2,500.
• If single and head of household, the maximum annual deposit is $5,000.
• If you are single and not head of household, your maximum annual deposit is $2,500.
• If married and filing jointly, the maximum annual deposit is $5,000.
• If either the participant or spouse earns less than $5,000 a year, your maximum annual deposit is equal to the lower of the two incomes.
• If the participant’s spouse is a full-time student or incapable of self-care, the maximum annual deposit is $3,000 a year for one dependent, and $5,000 a year for two or more dependents.

If married, BOTH spouses must earn income in order for the DCFSA to work. The only exception is if the non-earning spouse is disabled or a student. If one spouse earns less than $5,000 then the benefit is limited to whatever that spouse earned.

DCFSAs cannot be "pre-funded" like Medical Expense FSAs can; employees receive reimbursement as funds are deposited into the DCFSA. They may be used to receive reimbursement for eligible dependent care expenses for qualifying individuals.

A qualifying child:

• Is a U.S. citizen, national or a resident of the U.S., Mexico or Canada
• Has a specified family-type relationship to the participant
• Lives in the participant’s household for more than half of the taxable year
• Is 12 years old or younger and
• Has not provided more than one-half of their own support during the taxable year.

A participant’s spouse:

• Is physically and/or mentally incapable of self-care
• Lives in the participant’s household for more than half of the taxable year and
• Spends at least eight hours per day in the participant’s home.

A qualifying relative:

• Is a U.S. citizen, national or a resident of the U.S., Mexico or Canada
• Is physically and/or mentally incapable of self-care
• Is not someone else’s qualifying child
• Lives in the participant’s household for more than half of the taxable year
• Spends at least eight hours per day in the participant’s home and
• Receives more than one-half of their support from the participant during the taxable year.

Remember, only the custodial parent of divorced or legally separated parents can be reimbursed using a DCFSA.

It is important to budget appropriately when selecting a contribution amount. All funds that are left over in the account at the end of the plan year cannot be carried over to the next year or refunded. There is an IRS permitted grace period, and some employers have a run-out period in addition to this, which creates an extended period for filing claims and/or using funds beyond the plan year.

Partial List of Eligible Dependent Care Expenses:

• After school care
• Baby-sitting fees
• Daycare services
• In-home care/au pair services
• Nursery and preschool
• Summer day camps

Partial List of Ineligible Expenses:

• Books and supplies
• Child support payments or child care if you are a non-custodial parent
• Health care or educational tuition costs and
• Services provided by the participant’s dependent, spouse’s dependent or participant’s child who is under age 19.