As we move into fall, and especially as companies rethink their operations and benefit packages in light of COVID-19 and what could become a new normal, now is a great time to rethink your flexible healthcare and dependent childcare spending accounts.
Flexible spending accounts explained
A flexible spending account (FSA) is a tax-beneficial savings tool that allows employees to set aside a portion of their pre-tax wages to pay for certain eligible expenses. FSAs are set up by an employer for its employees.
Two types of flexible spending accounts
With a flexible health care expense account, employees can contribute to their bills to pay for qualified medical, dental, and visual care expenses.
With a flexible childcare expense account, employees can contribute to their bills to pay for qualified childcare expenses for children up to 13 years old. It can also be used to pay for the care of eligible adults who cannot fend for themselves and to comply with specific Internal Revenue Service (IRS) guidelines.
How Flexible Spending Accounts Work
Employees’ chosen contributions are deducted from their wages, before taxes, and contributed to their account, reducing taxable income.
The IRS limits how much an employee can contribute to an FSA account per year.
For healthcare FSAs, the 2020 limit per employee is $ 2,750.
For dependent childcare FSA accounts, the 2020 limit per employee is $ 5,000. Employees who are married but file a tax return jointly with their spouse have a lower limit.
Employers can choose to contribute to an FSA, but they don’t have to. If they do, their contribution does not reduce the amount an employee is allowed to contribute.
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Funds not used during the Plan year will lapse
Employers can design their FSAs so that employees have flexibility in the use of funds. Employers can apply a grace period. This is a period after the end of the plan year in which employees can still make claims. Alternatively, an employer can allow employees to transfer up to $ 550 in unused funds to the next plan year.
6 Benefits of Flexible Spending Accounts
Tax Savings: Employees contribute to their FSAs through payroll deductions, so the money is withdrawn before taxes. This lowers taxable income, meaning participants owe less federal taxes.
Medical Savings: Health insurance doesn’t always cover expenses like over-the-counter drugs, travel vaccines, and diagnostic tests. FSA healthcare participants can pay for these items with their FSA funds.
Family health coverage: Expenses incurred by family members can be refunded from the account.
Increased Net Pay: An FSA lowers the employee’s federal and FICA tax burden; this way it can eventually increase his / her net pay.
Immediate Availability of Funds: With regard to a health care FSA, the total annual election of employees (minus any benefits paid) is available regardless of actual wage contributions for the year to date.
Debit Card: Many FSAs are connected to debit cards, so attendees can use the card to pay for qualified expenses at the point of sale instead of filing claims.
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