FSAs: Flexible Spending Accounts

Attention Worksite Marketing Agents! FSAs can help you put more money back into the employee's hands without having to increase employer costs at all! In fact, you might even save employers some money too. By setting up an IRS Section 125 Plan Flexible Spending Account you can help an employee who earns $30,000 each year reduce their taxes by as much as $1,200.

What is a FSA (Flexible Spending Account)?
A Flexible Spending Account is an account funded by employee salary deferral elections and, in some cases, employer contributions, for the purpose of reimbursing expenses on a pre-tax basis. Most plans offer two types of accounts: Medical (also called Health Care) for reimbursement of eligible medical, dental, vision, prescription and over-the-counter drug expenses; and Dependent Care for reimbursement of day care expenses.

Which types of medical expenses are generally not eligible for reimbursement under a Medical FSA?
Premiums for health insurance and Medicare, and any expenses reimbursable by insurance, Workers' Compensation, or any other means. Expenses for cosmetic procedures and products are also generally not reimbursable. Also, toiletries and dietary supplements for general good health are not reimbursable.

What is the maximum amount which can be contributed to a FSA?
Participants are eligible to contribute up to a maximum of $5,000 ($2,500 for married individuals filing separately) for any one tax year. The contributions, however, cannot exceed the earned income of the lower-paid spouse. Also, participants may need to choose between a dependent care reimbursement account or the dependent care tax credit because the tax credit maximum is reduced dollar for dollar for each dollar placed into a reimbursement account. Please be aware that the plan year may not coincide with the tax year.

What expenses may be reimbursed through a FSA?
Expenses must be employment-related expenses incurred for the care of a dependent of the employee.

Is there a way to get a list of all expenses that can be covered in a flexible spending account?
A list of ALL the expenses is not available. However, the IRS offers two publications that are very helpful.

Publication 502 outlines qualified Medical and Dental expenses allowed under Code Section 213. A Health Care FSA also permits qualified expenses as defined in Section 213, with limited exceptions. Publication 502 indicates that certain expenses for insurance premiums are covered by Code Section 213, but they are not allowed in a Health Care FSA.

Publication 503 describes covered Child and Dependent Care Expenses. It also explains the Dependent Care tax credit in detail.

You can obtain a copy of each Publication by calling the IRS Forms Distribution Center at 1-800-TAX-FORM (1-800-829-3676), or on the web at www.irs.ustreas.gov