Flexible Spending Accounts
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Health & Dependent Care Flexible Spending Account’s (FSA)
What is a Health FSA?
A Health Flexible Spending Account allows employees to use pre-tax dollars to pay for medical bills not covered by their insurance. The Health FSA plans can also be offered in conjunction with a premium only plan (P.O.P.) and/or a Dependent Care FSA. The FSA is a budgeting tool that can help take care of out-of-pocket expenses such as dental, optical care, insurance deductibles, co-pays, and prescription drugs. Like a P.O.P. plan, the FSA helps pay for itself by increasing employee take-home pay while decreasing employer payroll taxes.
Here’s how it works
An employee decides how much of their salary should be set aside before taxes are calculated (up to the IRS maximum limit).
This amount is automatically deducted from their paycheck every pay period, just like any other payroll deduction, and is deposited into their Health FSA account.
There are two methods in which the employees would pay their out-of-pocket expenses. First is by using a smart card. Simply swipe the card and funds will be paid directly to your provider. If a smart card is not available, the employee will pay up-front and then submit a claim and documentation and a reimbursement is made from their own account.
Common eligible health care expenses include:
- Deductibles
- Eye exams / eyeglasses
- Contact lenses / saline solution
- Lasik surgery
- Prescription drugs
- Over the counter drugs
- Hearing exams / hearing aids
- Doctor fees
- Co-payments / Co-insurance
- X-ray and laboratory services
- Chiropractic services
- Dental work / Orthodontia
- Smoking cessation Refer to the IRS publication 502 medical and dental expenses for a complete list of eligible health care expenses and maximum allowable limits. The flexibility of an FSA plan makes it the best option for any size businesses. You should consult a tax professional to review your particular tax situation.
What is a Dependent Care FSA?
A Dependent Care FSA allows an employee to be reimbursed on a pre-tax basis for childcare or adult dependent care expenses for qualified dependents that are necessary to allow the employee or their spouse to work, look for work, or attend school full-time.
A Dependent Care FSA can be used to reimburse employees with pre-tax dollars (up to the IRS maximum limit) if the expenses for dependents meet the IRS definition of dependent for income tax purposes. An adult (e.g., parent, grandparent), disabled child may qualify as a dependent if the employee is providing more than half of that person’s maintenance for the year.
Dependent care FSAs limit the annual maximum allotment by law. If an employee is currently receiving a childcare subsidy, they must ensure that the total amount they elect through the FSA combined with the total amount of the childcare subsidy they receive does not exceed the maximum allowable limit. If married, the limit must be observed by the employee and their spouse where both individuals have access to an FSA and/or a childcare subsidy.
Who is a qualifying dependent for a DCFSA?
A qualifying dependent is a: Dependent of the enrolled employee who is under age 13; or a dependent or spouse of the enrolled employee who is mentally or physically incapable of caring for himself or herself, and who the employee claims as a dependent on his or her Federal Income Tax return.
To claim dependent care expenses, employees must meet the following conditions:
- The employee must have incurred the expenses in order for them and their spouse to work or look for work unless the spouse was either a full-time student or was physically or mentally incapable of self-care.
- The payments for care cannot be paid to someone the employee can claim as their dependent on their tax return or to their child who is under age 19.
- Your filing status must be single, head of household, qualifying widow(er) with a dependent child, married filing jointly, or married filing separately.
- The care must have been provided for one or more qualifying persons identified on the form you use to claim the credit.
- You (and, if you’re married, your spouse) must maintain a home that you live in with your qualifying child or dependent.
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Can a Dependent Care FSA pay for a babysitter in the employee’s home rather than using a daycare facility?**
Yes. Employees can include expenses paid to a babysitter if the services are necessary in order for the employee and their spouse, if married, to work, look for work, or for your spouse to attend school full-time.
Is day camp during the summer qualified child care?
Yes. If attendance at that camp allows you and your spouse to work, look for work, or for your spouse to attend school full-time.
Is a private school tuition payments qualified child care?
No. School tuition is not child care. But before/after school care is a qualified expense. The employee’s provider may be required to itemize the costs between tuition and before/after school care.
**Does the employee have to submit an identical claim amount every week or can they set up an automatic reimbursement?
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Employees must submit a claim every time they wish to request reimbursement of an expense. There is no automated process. Many individuals file claims monthly to eliminate weekly claim submission. However, it truly depends on the employee’s specific needs and whether they can wait until the end of the month for reimbursement or if they need to receive funds weekly. Regardless of the amount on their claim they will only be reimbursed up to the amount in their account at that time.
Can employees be reimbursed for dependent daycare expenses once they have paid for them?
No. Eligible Dependent Care expenses are reimbursable when they are actually incurred. Expenses are treated as incurred when the employee has been provided with the service, not when they are billed or pay for the service.
Example: On March 1 you pay for the entire month’s dependent daycare expenses. You can be reimbursed once the services have been provided, not on March 1 when you paid for it. You can submit claims after each week, every two weeks, or wait until the end of the month.
A Tax Identification Number (TIN) is required on the claim form. If the employee’s babysitter/provider does not have a TIN, the employee must submit his/her nine-digit Social Security Number with the claim form. If the babysitter/provider does not have a Social Security Number, the employee is required to submit a letter indicating that they have attempted to obtain a SSN or TIN from the provider and they are unable to do so, as the provider does not have one or will not provide it to the employee.
Are there limitations that apply to DCFSAs on an aggregate basis?
Yes. The IRS sets the maximum amount an employee may elect to a Dependent Care FSA. This limitation is the maximum pre-tax benefit for all dependent care programs, available to employees, including programs other than FSAs. As a result, if an employee is receiving a child care subsidy and the combined benefit to that employee exceeds the limit, both the employee and the Agency will be responsible for tax on any aggregate amount that exceeds the limit.
Amounts exceeding the applicable limit could also happen if both spouses work for employers offering an FSA program and both choose a Dependent Care FSA, which combined, exceeds the applicable limit.
Dependent Care FSA versus Child Care Tax Credits?
Depending upon your employee’s particular tax situation, it may be more advantageous for employees to use the tax credit rather than a Dependent Care FSA exclusion. If the applicable limitation is exceeded, the excess is included in income and taxable. There is a Dependent Care Tax Credit Worksheet that can help you determine which option is best for you.
Refer to the IRS publication 503 child and dependent care expenses for a complete list of eligible dependent care expenses and maximum allowable limits.
You should consult a tax professional if you are unsure of which option is more beneficial for your particular tax situation.
For an excellent summary of Cafeteria Plan Rules, see IRS Publication 15-B