1. What is a Flexible Spending Account (FSA)?
An FSA is an employer-sponsored plan that allows to deduct dollars from your paycheck and deposit them into a special account that’s protected from taxes. FSA accounts are exempt from federal taxes, Social Security (FICA) taxes and, in most cases, state income taxes. The money in an FSA can be used for eligible health (for health FSAs) and dependent care (for dependent care FSAs) expenses that are incurred while you are participating in the plan.
2. When does my FSA become effective?
Your FSA becomes effective on the effective date specified by your employer, provided you have enrolled. Unlike other plans, an FSA does not start on your hire date. Contributions to your account begin as soon as administratively possible after you enroll.
3. How do I participate in an FSA?
To participate, typically you must enroll within 31 days of your date of hire (however this could be longer depending upon your employers waiting period), or elect to participate during annual Open Enrollment. If you have a life event change (for example, birth or adoption of a child), then you may be able to enroll without waiting for annual Open Enrollment, if you enroll within 31 days of the change.
4. Who can put money in my FSA?
You and your employer, although employers rarely contribute to employees’ FSAs.
5. What does it mean to incur expenses?
The IRS considers expenses to be "incurred" at the time you receive medical care or dependent care--not when you are formally billed or actually pay for services. Only eligible expenses you incur within the plan year, including any employer-allowed grace period, are eligible for reimbursement.
6. Who qualifies as an eligible dependent for a Dependent Care FSA?
An eligible dependent is any dependent for which an employee pays a provider to care for him/her while they are at work or looking for work. The dependent must be under the age of 13 or incapable of taking care of themselves, and live in the employee’s home for more than half of the year.
7. How often can I request reimbursements?
Reimbursements can be requested as often as qualified expense are incurred. Expenses must be incurred during the plan year (or grace period if applicable) and the reimbursement must be requested before the end of the run-out period.
8. What happens if I have money remaining in my account at the end of the year?
On October 31, 2013, the U.S. Department of Treasury changed the policy on remaining funds in FSA’s. You are now able to roll over remaining funds into your next plan year up to $500.00 (if your employer has implemented this option). This rollover means enrollment in an FSA is much less risky. This gives you more flexibility to spend your FSA money when you need it. You can use it for necessary out-of-pocket healthcare expenses, rather than feeling pressured to engage in last minute and potentially unnecessary spending at the end of the year or grace period.
9. Can I change my election or stop contributing money to my FSA at any time during the plan year?
Federal regulations state that once you have enrolled in an FSA, you cannot change your election amount unless you have a qualifying life event. Your FSA Administrator can give you a list of permitted change events.
10. How much will I really save in taxes by contributing to an FSA?
Generally, contributions you make to your FSA are not subject to federal or social security taxes. In most instances, there are no state taxes taken out either. The amount you may save depends upon:
- The amount you put into your FSA
- The tax percentage you would normally pay on that money (tax bracket)
Let's say you want $2,000 taken out of your paycheck this year to put into your FSA. The money you direct to your FSA is taken out of your check before taxes are taken out. That reduces your taxable income by $2,000.
Let's say you normally pay 30 percent in federal, social security and state taxes on your income. In this example, you would enjoy a tax savings of 30 percent of the $2,000. In other words, you could get a $600 tax savings on the $2,000 you directed to your FSA. Plus the new rollover feature assures that any unused balance of up to $500 will still be there for you in the next plan year (if your employer has implemented this option).
11. What type of flexible spending plans are there?
- Health Care FSA: Covers medical, prescription, dental and vision expenses
- Dependent Care FSA: Covers dependent care expenses including daycare, nursery school and day camp for children, and services for adult dependents who cannot care for themselves
- Limited Health Care FSA: Covers dental and vision expenses only (for compliance with a health savings account)