We recently received our annual enrollment benefits paperwork. Now is the time of the year that companies are requesting employees to adjust benefit options for the new plan year. We are lucky in that all of our benefits are remaining the same and our contribution amount isn't changing (that is nearly unheard of!).
The one area we always adjust each year is our Flexible Spending Account. Perhaps your remember the reader saving tip sharing how a Flexible Spending Account can help to reduce your taxes. I wanted to take some time to explain what a Flexible Spending Account is and how it help you save money.
I do have a background in HR but this stuff changes all the time. Be sure to consult with your HR team for specific information related to your company's FSA plan.
What is a Flexible Spending Account
To put it simply, a Flexible Spending Account (also known as FSA) is a savings account that you add money to via payroll deduction and is managed by your employer. You determine how much you want to set aside for the plan year (there are limits) and your employer adds your deduction directly to your FSA account.
This deduction is pre-tax, so it helps to lower the overall tax you owe at the end of the year. You can use this money to pay for qualified expenses throughout the plan year.
Types of Flexible Spending Accounts
There are two types of FSA's and we have used them both.
The first, and most popular, is the Health Care FSA. Your FSA monies can be used to pay for qualified medical expenses like insurance deductibles, co-payments, and coinsurance costs as well as specific products, treatments, and medications not covered by insurance. Medical issues can be serious, or as simple as purchasing some over-the-counter meds (with a doctor's RX).
Your Health Care FSA balance is established before your plan year begins. Since our plan year begins January 1, any expenses starting on the 1st go on the new plan year FSA expenses. The FSA enrollment total we set will be in our FSA account and is available to use on January 1 (yes, the full balance can be used on January 1).
The second FSA type is the Dependent Care FSA. Again, you set aside monies in your FSA account solely for child care expenses. In the past we used these for our daycare expenses. However, if you are caring for an elderly dependent living with you, this also qualifies for reimbursement.
All money put aside must be spent within the “plan year”, which is usually the calendar year but for some companies can be the fiscal year. The money left in the account at the end of the plan year is forfeited back to the company. Use it or lose it.
All expenses must “qualify.” These vary by company and by FSA type.
Receipts are required for all expenses. You will need to obtain documentation from your daycare provider which includes their tax EIN to ensure it is a legitimate tax entity. All medical expenses require valid receipts to back up any procedures and/or purchases.
Why use a Flexible Spending Account?
Now why would you want to save this money as you go along? Well, first off the tax benefit is great. Any payroll deductions are pre-tax reducing your taxable income come tax time (nice!).
The other fab benefit is that many employers also offer a FSA debit card for your health care expenses. So, rather than paying for the expense out of pocket, you can use your card to pay the balance in full immediately. No need to deal with the reimbursement forms.
You will still need to keep all receipts when you are using the FSA card in the event you are audited. I have been asked for documentation mostly for our dental visits. I have no clue why, but that seems to be when they require expense substantiation. So always keep your receipts even when your expense is legitimate. If you don't provide this information, your FSA card may be turned off.
Again, all of your Health Care FSA money is loaded to your FSA account on the first day the plan begins (which is January 1 for our plan year). The nice benefit of this is that if you have a large expense in January, you can use your FSA card and pay the amount immediately without having all of your payroll deductions. You could also pay for the expense out of pocket and submit a reimbursement form for the full amount.
Another thing many employers don't share openly is that since your Health Care FSA monies are available to you on day 1, you can choose to use the entire balance immediately. And, hypothetically, if you choose to leave the company on day 2, you are not required to pay back any of those monies even though you didn't contribute the full amount.
On the flip, if you don't use or request reimbursement of your FSA monies by the plan's expiration date, the unused amount is forfeited back TO the company. If you have money left and no major expenses, you can always use your money towards over-the-counter medications (which now require a RX). Be sure to request a list of eligible Health Care FSA expenses – even special dietary requirements (i.e., gluten free, salt free, etc.) are considered a *maybe* for plans.
Ultimately, plan out exactly what expenses you think you will to have covered for the upcoming year so you have enough money set aside and you can take advantage of the tax benefits!
Do you have any questions on Flexible Spending Accounts?
Or, do you currently use a FSA?