Health Flexible Spending Accounts (FSA), otherwise known as Flexible Spending Arrangements, are employer established savings accounts that allow you to contribute money you can use for IRS approved medical and dependent care expenses.
Through the Pension Boards, you can set up two reimbursement savings accounts— one for medical and one for dependent care expenses—where you can choose to set aside a portion of your income pretax to pay for expenses you will face in the upcoming year. Setting up a Flexible Spending Account can be very beneficial for you and your family.
No federal or employment taxes: One of the many benefits of a Flexible Spending Account is you do not pay federal or employment taxes on that money. At the beginning of each plan year, you must elect an amount to voluntarily be withheld from your pay through your employer. Each pay period throughout the year, your elected dollar amounts are deducted from your salary pretax and placed into your FSA. That means, you can save the percentage you would have paid on that money in your overall tax bill!
Example: Let’s say you contribute $3,000 into an FSA account. That amount is deducted from your gross salary. If your tax rate is 25%, you could have a potential tax savings of $750 on that amount that was deducted pretax for your FSA!
When you need to use your FSA funds, the money can be only be spent or reimbursed on IRS qualified medical or dependent care expenses that are incurred during that plan year. In short, qualified medical expenses are expenses not covered by your health insurance.
Below are some examples of qualified, IRS approved medical expenses not covered by medical insurance:
Making the decision on how much to save for your medical and dependent care expenses merits consideration. You want to save enough money to cover anticipated expenses, but you also want to be aware of the ‘use it or lose it’ provision. Although the Pension Boards does allow a small carry over of funds into the next plan year, if you do not use most of the money you set aside for your FSA, it is forfeited to the plan.
There are several factors when trying to decide how much money to elect each year for an FSA.
These are some important considerations. You can also think about what the next year will bring. Do you have any upcoming procedures? Will you now have fulltime childcare costs?
Also know that each year the Pension Boards uses IRS guidelines to determine the maximum amount you are able to contribute for that plan year. This is a significant point to factor into your decision, as well. Visit www.irs.gov for this yearly update in late fall.
In some cases, verification that the IRS qualifies your expenses will occur automatically. Sometimes more verification is required. General credit card receipts will not work for this purpose. For charges that require substantiation, various details are required such as your name, healthcare provider’s name, date of service, type of service, and the expense amount. If proper documentation is not available when substantiation is required, your account could be locked until that verification is completed.
There is a lot to think about in terms of FSAs, but what is abundantly clear is how much value they offer. A wide range of IRS qualified expenses, products and services are available to you. You can use your hard-earned money for those costs and reap the benefits of tax savings. This allows you to keep more of what you earned while taking care of what you need. Plan ahead for the upcoming year, make sure to save receipts to help with IRS verification, and you are all set. No health insurance covers it all and that is where Flexible Spending Accounts come in to help!
