Flexible Spending Accounts a Boon for Taxpayers
Patricio Figueroa Jr.
In these times of recession and increasing costs for
commuting, food and housing, not-for-profit organizations (NPOs) are examining
ways to increase the take-home pay of their employees. 
With virtually no cost to the organization, staff members
may be able to reduce their taxable income and get reimbursed for medically
related out-of-pocket expenses and over-the-counter medicines. The caveat is
that one must get and save co-pay receipts for doctor and dentist visits,
pharmaceutical costs and other eligible expenses. Most pharmacy chains print
receipts that enumerate each item and which are eligible for reimbursements.
Depending on the account selected, one can have child-care (day care) or
home-assistance services covered for a spouse or parent. This benefit is called
a flexible spending account, or FSA.
What are FSAs?
A flexible spending account is a tax-favored program
offered by employers that allows their employees to pay for certain
out-of-pocket health-care and dependent-care expenses with pretax dollars. By
using pretax dollars, an FSA provides an immediate discount on those expenses
equal to taxes one otherwise would pay on that money.
Those with FSAs can both reduce their taxes and get more
for their money by saving up to 40% more than usual for out-of-pocket
health-care and dependent-care expenses with after-tax (as opposed to taxed)
dollars.
The federal government's flexible spending account program
( FSAFEDS) offers three types of FSAs:
- The health care flexible spending account (HCFSA),
which can be used to pay for qualified medical and health care expenses that
are not paid by a Federal Employees Health Benefits (FEHB) plan or any other
insurance. Note : HCFSA cannot be used to pay for any type of
insurance premiums, including long-term-care insurance premiums.
- The limited expense health care flexible spending
account (LEX HCFSA), only available to employees who enroll in a FEHB program
under a high deductible health plan (HDHP) with a health savings account (HSA).
Eligible expenses are limited to dental and vision care services and products
that meet the IRS definition of medical care . Using an LEX HCFSA can allow use
of HSA funds for other purposes.
- The dependent care flexible spending account (DCFSA).
It is used to pay for eligible dependent-care expenses such as child care for
children under age 13 or day care for anyone claimed as a dependent on a
federal tax return who is physically or mentally incapable of self-care, It is
used so that a person with a dependent (and spouse, if applicable) can work,
look for work or attend school full time.
Participation in any FSA is completely voluntary. Unlike
other federal benefits, however, a chosen FSA is only in effect for one benefit
period . In other words, participants must enroll each year . Those who do not
enroll during open season are not allowed to participate in the next benefit
period unless they claim a
qualifying
life event (QLE) that allows them to make an election outside of open
season. Open season for FSAFEDS runs concurrently with the FEHB open season in
November and December each year for enrollment the following year.
The FSAFEDS benefit period is from January 1 st through
March 15 th of the following year. It includes a 2½-month grace period
from January 1 st through March 15 th of the following year. During the grace
period, eligible expenses incurred from January 1 st through March 15 th of the
following year can be applied toward a prior year's balance. The intent is to
help account holders avoid forfeiting any of the funds they deposited in FSA
accounts. Participants should carefully consider the amount they choose to set
aside in the account.
The U.S. Office of Personnel Management has adopted the
grace period on behalf of all agencies and employees who are part of FSAFEDS
and has also extended the filing deadline for claims against the prior-year
account (including claims incurred during the “grace period”) to
midnight Eastern Standard Time on April 30 th .
FSAFEDS follows Internal Revenue Service (IRS) guidelines
to determine eligible expenses and other requirements for participation in an
FSA issued under Sections 105, 125, and 129 of the Internal Revenue Code.
Differences Among FSAs
A health care flexible spending account pays for the
qualified medical expenses not covered or reimbursed by an FEHB plan (health
insurance plan) or any other type of insurance. It is NOT limited to only
dental and vision care services or products.
Though the LEX HCFSA is similar to the HCFSA, it differs
by the type of expenses it covers. The expenses are limited to dental and
vision care services or products that meet the IRS definition of medical care.
In addition, only those employees who have a HDHP/HSA are eligible to enroll in
an LEX HCFSA.
The dependent care flexible spending account pays for
child care or adult dependent care expenses that are necessary to allow a
person or that person's spouse to work or attend school full time. It also pays
participants while they or their spouses look for work; it does not pay if no
job is found or there is no earned income for the year. The dependent care
flexible spending account does NOT pay for medical care for dependents.
Despite the differences among the accounts, each allows
participants to pay for qualified expenses with pretax dollars, money that is
deducted from a paycheck before taxes are taken out by an employer -- a savings
of 20% to 40% or more.
An FSA offers tax savings by
allowing participants to pay for out-of-pocket expenses with pretax money.
Without an FSA, people would still pay for these expenses but with money
remaining in their paychecks after federal (and often state and local) taxes
are deducted.
Patricio Figueroa Jr. is the editor and publisher of
Independence Today . |
