Thursday, February 09, 2006

FAQ of the flexible spending account (FSA)

What is FSA
FSAs are a tax-saving benefit that some employers offer to help their employees pay for medical and dependent care expenses.

Why should I enroll
The reason is really simple: They can save you money! When you look at your paycheck, you'll find that you always take home less money than you actually earn because a portion of it has been taken by uncle sam. However,because of Section 125 of the Internal Revenue Code, you can take back all the money that’s set aside in an FSA if you plan it ahead wisely. That means the money in FSAs is tax-free.

How do they work
Typically, employers offer an opportunity to enroll in FSAs during their regular benefits open enrollment. If you want to enroll in an FSA next year, this is a perfect time to begin planning. You need to elect an amount of money for your employer to deduct from your pay on a pre-tax basis. The money is deposited into your account over the course of the upcoming plan year. You can then use that money to pay for certain out-of-pocket expenses, depending on the type of FSA you have.

How many types of FSAs are there and what's the difference between them
There are two types: Health care spending accounts (HCSA)& Dependent care spending accounts (DCSAs)

With an HCSA you use the money for health care expenses, such as co-payments, dental and vision work, over-the-counter medications, and much more. If you have qualified dependents, you can use your HCSA for their health care expenses as well. IRS gives a list of medical expenses that you can claim when filing your taxes; this will give you an idea of the types of expenses that are considered eligible for HCSA reimbursement. However, check with your employer for a complete list.

With a DCSA, you use the money for any child care or adult day care expenses you incur to be able to go to work or look for a job. IRS Publication 503 can be used as a guide for eligible DCSA expenses. Also you need to check with your employer for specific requirements.

How do you access money in an FSA
FSAs operate as reimbursement plans -- first, you pay for the expenses out of your own pocket. Then, you submit a form and receipts for reimbursement from your account. You typically can submit claims up until 90 days after the end of the plan year.

HCSAs are “pre-funded,” which means that your entire election is available at the beginning of the plan year, even though it hasn’t actually been deducted from your pay. That means you can get reimbursed more than you contributed. It is just like giving you a 0APR loan. For DCSAs, however, you can only be reimbursed up to the current balance in your account.

Some health care FSA administration is offering the FSA debit card, which allows participants to pay for expenses directly from their account rather than waiting for reimbursement. FSA debit cards can really cut down your paperwork, but you’ll still need to keep your receipts in case your employer needs them for verification purposes.

What's the coverage period of FSAs
The IRS “use it or lose it” rule. You can only use money in your FSA for expenses incurred within the plan year. You will not be able to use money in your FSA to reimburse expenses incurred after the end of the plan year, so you’ll have to forfeit any remaining funds. That's why I said you should plan it wisely.

However, the U.S. Treasury announced in May 2005 that employers can establish a grace period of up to two and a half months to allow participants access to the previous year’s balance for purchases made in the early part of the following year. Check with your employer to see if your FSAs have a grace period.

What's the limitations of FSAs contribution
The IRS limits how much money you can contribute to a DCSA. In 2006, the maximum is $2,500 if you are single or filing separately; if you are filing jointly, it’s $5,000.

The IRS has not set a limit for how much money you can set aside in an HCSA, but your employer will set a maximum -- usually between $2,000 and $5,000.

Is there any tips
Start tracking your medical expenses now so you’ll have a good idea how much you should elect to contribute to an HCSA. If you have child care or adult day care expenses, track those if you want to enroll in a DCSA. When it comes time to enroll, it’s a good idea to underestimate how much you’ll need. You don’t want to find yourself scrambling to use up the remaining funds in your account at the end of the year.

What's the difference between HCSA and HSA
HSAs allow you to save money for eligible medical expenses only when you’re enrolled in a high-deductible health care plan. But the good thing is that there is no “use it or lose it” rule. But most employers do not yet offer these plans.

2 Comments:

At 2:39 PM, Anonymous Anonymous said...

If you have to pay out of pocket for an expense and you get reimbursed from your own money; are you not paying for the expense twice? Where is the savings?

 
At 4:46 PM, Anonymous Anonymous said...

what you saved is the tax

 

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