Flexible Spending Accounts (FSAs) provide an important tax advantage that can help pay health care and dependent care expenses on a pre-tax basis and lower your taxable income.

An employee sets aside a portion of their pre-tax salary in an account, and that money is deducted from their paycheck over the course of the year. The amount contributed to the FSA is not subject to Social Security (FICA), federal, state, or local income taxes — effectively adjusting their annual taxable salary. The taxes paid each paycheck and collectively each plan year can be reduced significantly, depending on the employee’s tax bracket. And, as a result of the personal tax savings realized, the employee’s spendable income will increase.

FSA Health Care Reimbursement
The Health Care Reimbursement FSA lets employees pay for certain IRS-approved medical care expenses not covered by their insurance plan with pre-tax dollars. For example, cash that employees now spend on deductibles, copayments, or other out-of-pocket medical expenses can instead be placed in the Health Care Reimbursement FSA pre-tax, to pay for these expenses.  Employers determine the annual maximum contribution to the Health Care Reimbursement FSA that is allowed each year.

Eligible health care expenses for the Health Care Reimbursement FSA include more than just the employee deductible and copayments. Generally, any medically necessary health care expense that could be deducted on your tax return is considered an eligible expense. Some examples include:

• Hearing services, including hearing aids and batteries
• Vision services, including contact lenses, contact lens solution, eye examinations, and eyeglasses
• Dental services and orthodontia
• Chiropractic services
• Acupuncture
• Prescription contraceptives

For more information about eligible medical expenses, please refer to IRS Publication 502, Medical and Dental Expenses available at http://www.irs.gov/publications/p502/index.html

Dependent Care FSA
The Dependent Care FSA lets employees use pre-tax dollars towards qualified dependent care. The annual maximum amount that may be contributed to the Dependent Care FSA is $5,000 (or $2,500 if married and filing separately) per calendar year.

Employees who contribute to the Dependent Care FSA may be reimbursed for:

• The cost of child or adult dependent care
• The cost for an individual to provide care either in or out of your home
• Nursery schools and preschools (excluding kindergarten)

In order for dependent care services to be eligible, they must be for the care of a tax dependent child under age 13 who lives with the employee, or a tax dependent parent, spouse, or child who lives with the employee and is incapable of caring for himself or herself. The care must be needed so that the employee and their spouse (if applicable) can go to work. Care must be given during normal working hours — Saturday night babysitting does not qualify — and cannot be provided by another of the employee’s dependents.

At Progressive Benefit Solutions, we have tools and provide Employee Communication and Education materials so it is easy for employees to determine if a FSA will save them money.

The one drawback employees typically associate with FSAs is that IRS regulations state that the money an employee sets aside must be used for expenses incurred during the plan year in which the employee makes the election.  Any funds left in the account at the end of the year are forfeited and go to the employer to help offset some of the costs associated with their administration of the benefit plan.