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A flexible spending account (FSA) is a tax-advantaged financial account set up through the cafeteria plan of an employer in the United States. An FSA allows an employee to set aside a portion of his or her earnings to pay for qualified expenses as established in the cafeteria plan, most commonly for medical expenses but sometimes for dependent care or other expenses. Money deducted from an employee's pay into an FSA is not subject to payroll taxes, resulting in a substantial payroll tax savings. A cafeteria plan is a type of employee benefit plan offered in the United States pursuant to Section 125 of the Internal Revenue Code. ...
In the United States, payroll tax is tax that pays for two social insurance systems: Medicare and Social Security. ...
The most common FSA, the medical expense FSA (also medical FSA or health FSA), is similar to a health savings account (HSA) or a health reimbursement account (HRA). However, while HSAs and HRAs are almost exclusively used as components of a consumer driven health care plan, medical FSAs are commonly offered with more traditional health plans as well. A Health Savings Account (HSA) is a tax-advantaged medical savings account available to taxpayers in the United States. ...
This article or section is in need of attention from an expert on the subject. ...
This article or section is in need of attention from an expert on the subject. ...
Advantages and disadvantages of all FSAs
An FSA allows money to be deducted from an employee's paycheck pre-tax and then spent on qualified expenses.
For an example of potential tax savings associated with a flexible spending account, a person in the 28% Federal marginal tax bracket and an example 4% state tax (along with FICA taxes of typically 7.65%, for a total tax of almost 40%), could deduct $2,000 and put that money into an FSA for health care. (The issues are more complex for dependent care FSAs.) This would result in almost $800 in tax savings. Tax brackets are the divisions at which tax rates change in a progressive tax system (or an explicitly regressive tax system, although this is much rarer). ...
Federal Insurance Contributions Act (FICA) tax is a United States tax levied in an equal amount on employees and employers to fund old-age, survivors, and disability insurance portion of the Social Security system and the hospital insurance portion ( Medicare). ...
If this example person had not utilized the FSA and instead itemized their deductions, they likely would not have been able to deduct this $2,000 expense because it would not have met the 7.5% of Adjusted Gross Income threshold needed to be able to deduct it on their federal tax return. Even if the expenses had met the 7.5% threshold, only the part in excess of 7.5% would count as an itemized deduction; and itemized deductions are only beneficial if they exceed the standard deduction, which is hard to meet unless you have home mortgage interest or large charitable contributions. Finally, expenses for over-the-counter drugs cannot be deducted or counted towards the 7.5% threshold, but they can be paid for by the FSA. Adjusted gross income (AGI) is a financial term to describe the amount used in the calculation of an individuals income tax liability. ...
Look up Tax return in Wiktionary, the free dictionary For tax returns in the United States see Tax return (United States); for tax returns in Canada see Tax return (Canada). ...
Individual taxpayers in the United States are faced with a choice when preparing their tax returns. ...
Individual taxpayers in the United States are faced with a choice when preparing their tax returns. ...
One major drawback is that the money must be spent within the "plan year" as defined by the cafeteria plan (commonly the calendar year), and any money that is left unspent at the end of the plan year is forfeited; this is commonly known as the "use it or lose it" rule. In 2005, the Internal Revenue Service authorized an optional 2½ month grace period that employers can use in their plans, allowing use of the funds for 2½ months after the end of the plan year. Seal of the Internal Revenue Service The Internal Revenue Service (IRS) is the United States government agency that collects taxes and enforces the internal revenue laws. ...
In law, a grace period is a period of time during which a particular rule exceptionally does not apply, or only partially applies. ...
Also, the annual contribution amount must remain the same throughout the year unless certain qualifying events occur, such as birth of a child or death of a spouse.
Methods of withdrawal from FSAs Until recent years, the only way to withdraw funds from an FSA was to file a paper claim with your employer, or with a service vendor selected by your employer. Like paper claims for health insurance, these claims must be made on a specific form provided by the employer, and must be submitted with adequate receipts to substantiate your claim; otherwise, you will not be allowed to withdraw the money.
The IRS-imposed substantiation requirement generally means you must actually incur the expenses before you can withdraw the funds; in many cases (such as HMO copayments and pharmacy purchases), you must actually pay the service provider out-of-pocket first. Since in many cases this meant you paid twice (first as a payroll deduction, then again at the provider) before you could claim reimbursement, this was commonly known as "double-dipping". HMO can mean the following: Health maintenance organization Houses in multiple occupation Home Media Option (Tivo) This is a disambiguation page — a navigational aid which lists other pages that might otherwise share the same title. ...
In recent years, the FSA debit card was developed to eliminate "double-dipping" by allowing employees to access the FSA directly, as well as to simplify the substantiation requirement which required labor-intensive claims processing; the debit card also enhances the effect of "pre-funding" medical FSAs. However, the substantiation requirement itself did not go away, and has even been expanded on by the IRS for the debit-card environment; therefore, withdrawal issues still remain for FSAs. These issues are largely why HSAs were designed to not require substantiation prior to withdrawal, only as part of your tax records. Also, the IRS recently imposed onerous requirements for debit-card use with dependent care FSAs which largely negate the ability to avoid "double-dipping" on those accounts. An FSA debit card is a special type of debit card issued in the United States to access tax-favored spending accounts such as flexible spending accounts (FSA) and health reimbursement accounts (HRA), and sometimes health savings accounts (HSA) as well. ...
Types of FSAs Most cafeteria plans offer two different flexible spending accounts; one is for qualified medical expenses and the other is for dependent care expenses. A few cafeteria plans offer other types of FSAs, especially if the employer also offers a HSA. Participation in one type of FSA does not affect participation in another type of FSA, but funds cannot be transferred from one FSA to another.
Medical expense FSA The most common type of FSA is used to pay for medical expenses not paid for by insurance; this usually means deductibles, copayments, and coinsurance for the employee's health plan, but may also include expenses not covered by the health plan, such as dental and vision expenses and over-the-counter drugs. A medical FSA cannot pay for health insurance premiums, cosmetic items, cosmetic surgery, or items that improve "general health". All items must be intended to treat or prevent a specific medical condition; this can be as significant as diabetes or pregnancy, or as trivial as skin cuts. This article is about the disease that features high blood sugar. ...
The term trimester redirects here. ...
The annual cap for a medical FSA varies, as it is set by the employer thru the cafeteria plan.
Pre-funding One very important advantage of medical FSAs is that they are "pre-funded": If you set aside $2,000 per year in a medical FSA (as in the earlier example), the entire $2,000 is available for your use immediately--either at the start of the plan year (commonly January 1) or after the first contribution to the FSA is received by the FSA vendor, depending on the plan--even though you only contribute to the FSA in small increments throughout the year (for example, 1/26 of the annual amount if you are paid biweekly).
Also, if you "overdraw" your medical FSA (by withdrawing more than you contributed) and you then terminate employment, your employer cannot require you to repay the "overdraft". For this reason, some employers restrict participation in medical FSAs to limit their exposure; for example, the State of Arkansas (see "External links" at the end) requires employees to work for one year before opening a medical FSA. Some employers require a waiver of this provision in order to participate.
Though pre-funding started as an IRS regulatory requirement to make medical FSAs look like health plans, it quickly became an important feature to sell medical FSAs; though not required for HRAs or HSAs, some employers pre-fund these accounts as well. Pre-funding is very powerful when combined with FSA debit cards, so that employees can pay for medical expenses even when their cash flow is tight. An FSA debit card is a special type of debit card issued in the United States to access tax-favored spending accounts such as flexible spending accounts (FSA) and health reimbursement accounts (HRA), and sometimes health savings accounts (HSA) as well. ...
In finance, cash flow refers to the amounts of cash being received and spent by a business during a defined period of time, sometimes tied to a specific project. ...
Over-the-counter drugs & medical items Another very powerful medical FSA feature that has been introduced in recent years is the ability to pay for over-the-counter (OTC) drugs and medical items. In the past, medical FSAs were usually limited to expenses that could be deducted on your tax return as itemized deductions; the tax code specifically prohibits itemized deductions for drug expenses except for prescription drugs and insulin. However, in 2003 the IRS decided in Revenue Ruling 2003-102 that the anti-OTC clause applied only to itemized deductions and not to health plans, and that medical FSAs were health plans; therefore, they could pay for OTC items. This ruling was quickly extended to HRAs and HSAs as well. Individual taxpayers in the United States are faced with a choice when preparing their tax returns. ...
Insulin (from Latin insula, island, as it is produced in the Islets of Langerhans in the pancreas) is a polypeptide hormone that regulates carbohydrate metabolism. ...
Since medical FSAs, and their close relatives HRAs and HSAs, are the only way for most people to pay for OTC items on a tax-free basis, this is commonly seen as a selling point for medical FSAs, which are far more common than HRAs or HSAs; Johnson & Johnson, a major manufacturer of OTC items, has even created a website to promote medical FSAs. In addition to substantially expanding the range of "FSA-eligible" purchases, adding OTC items made it easier to "spend down" medical FSAs at year-end to avoid the dreaded "use it or lose it" rule. Johnson & Johnson (NYSE: JNJ) is a global American pharmaceutical, medical devices and consumer packaged goods manufacturer founded in 1886. ...
However, substantiation has again become an issue; generally, OTC purchases require either manual claims or, for FSA debit cards, submission of receipts after the fact. Most FSA providers require that receipts show the complete name of the item; the abbreviations on many store receipts are incomprehensible to many claims offices. Also, some of the IRS rules on what is and isn't eligible have proven rather arcane in practice; for example, condoms are OK since they prevent pregnancy, but K-Y Jelly isn't if it's used to lubricate them. The recently-developed inventory information approval system (IIAS), which separates eligible and ineligible items at point-of-sale and provides for automatic debit-card substantiation, should eliminate these issues and make medical FSAs very attractive for OTC purchases. An FSA debit card is a special type of debit card issued in the United States to access tax-favored spending accounts such as flexible spending accounts (FSA) and health reimbursement accounts (HRA), and sometimes health savings accounts (HSA) as well. ...
A 67 m long condom on the Obelisk of Buenos Aires, Argentina, part of an awareness campaign for the 2005 World AIDS Day A condom is a device, usually made of latex, or more recently polyurethane, that is used during sexual intercourse. ...
A tube of K-Y Jelly K-Y Jelly is a water-based, water-soluble personal lubricant produced by Johnson & Johnson. ...
An inventory information approval system, or IIAS, is a point-of-sale technology used by retailers that accept FSA debit cards, which are issued for use with medical flexible spending accounts (FSAs), health reimbursement accounts (HRAs), and some health savings accounts (HSAs) in the United States. ...
Point of sale at a Wal-Mart store. ...
Limited medical expense FSA FSAs generally cannot be used with HSAs, as IRS regulations treat most FSAs as "health plans" that conflict with the HSA requirement that the taxpayer be covered only by a "high deductible health plan". However, there are exceptions to this requirement, and many cafeteria plans now have "limited" medical FSAs designed to be used with HSAs by fitting into one of these exemptions. For example, one such exemption is for dental and vision insurance; therefore, some "limited" medical FSAs are limited to dental and vision expenses only.
Other than these limits, a limited medical FSA has the same features as other medical FSAs, including employer-set limits, "pre-funding", and the potential for over-the-counter drug coverage.
Dependent care FSA FSAs can also be established to pay for certain expenses to care for dependents that live with you while you are at work. While this most commonly means child care, it can also be used for adult day care for senior citizen dependents that live with you, such as parents. It cannot be used for summer camps (other than "day camps") or for long term care for parents that live elsewhere (such as in a nursing home). Childcare is the act of caring for and supervising minor children. ...
Old age consists of ages nearing the average lifespan of human beings, and thus the end of the human life cycle. ...
Long-term care (LTC) is a variety of services which help meet both the medical and non-medical need of people with a chronic illness or disability who cannot care for themselves for long periods of time. ...
The dependent care FSA is federally capped at $5,000 per year.
Unlike medical FSAs, dependent care FSAs cannot be "pre-funded"; employees can only receive reimbursement as funds are deposited into the FSA. Also, although FSA debit cards can be used with dependent care FSAs, they are subject to restrictive IRS requirements that generally require employees to pay the first child-care bill of each year by other means, among other things. An FSA debit card is a special type of debit card issued in the United States to access tax-favored spending accounts such as flexible spending accounts (FSA) and health reimbursement accounts (HRA), and sometimes health savings accounts (HSA) as well. ...
While medical FSAs almost always favor the taxpayer, dependent care FSAs are a more complicated matter because they are a tradeoff between pre-tax deductions and tax credits, not itemized deductions. Enhancements to child tax credits in recent years have made them more attractive than dependent care FSAs for many taxpayers.
Other FSAs Though not as common as the FSAs listed above, some employers have offered adoption assistance through an FSA. Also, though medical FSAs cannot reimburse for health premiums, some small employers without a health plan have established FSAs to reimburse their employees for individual health premiums. Adoption is the legal act of permanently placing a child with a parent (or parents) other than the birth parents. ...
See also A cafeteria plan is a type of employee benefit plan offered in the United States pursuant to Section 125 of the Internal Revenue Code. ...
This article or section is in need of attention from an expert on the subject. ...
This article or section is in need of attention from an expert on the subject. ...
An FSA debit card is a special type of debit card issued in the United States to access tax-favored spending accounts such as flexible spending accounts (FSA) and health reimbursement accounts (HRA), and sometimes health savings accounts (HSA) as well. ...
Health insurance is a type of insurance whereby the insurer pays the medical costs of the insured if the insured becomes sick due to covered causes, or due to accidents. ...
This article or section is in need of attention from an expert on the subject. ...
It has been suggested that this section be split into a new article entitled Medical Savings Account. ...
References
External links - Health Decisions - Reliable news and a comprehensive learning center relating to consumer driven health products.
- Most published information on FSAs is found on the websites of FSA vendors; two with which a major contributor to this article (and original author of the cafeteria plan and FSA debit card articles) is personally familiar with are:
- 2007 Flexible Benefits Plan/State of Arkansas Cafeteria Plan (ARCAP) Reference Guide - Employee guidebook for a cafeteria plan with medical (including debit card), limited medical, and dependent care FSAs
- Official IRS site on FSAs - Explains which medical expenses are covered and which are not.
- Health Savings Accounts vs. Health Reimbursement Accounts vs. Medical Savings Accounts vs. Flexible Spending Accounts - very helpful PDF chart comparing these, but has not been updated since 2005
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