For full-time and salaried employees, a group health plan is still the most common benefit offered by employers. With rising costs of insurance, and the fact that group health plans include people with pre-existing conditions, many employers opt for lower premiums with higher deductibles. This reduces their expenses while still providing protection against catastrophic loss.
With this tactic becoming more common, employers are providing other options to manage the cost of high deductibles. The flexible spending account (FSA) is the oldest form of health savings account. It allows employees to set aside funds for healthcare spending. The money is taken from pre-tax income, which makes it a cost-effective way of paying for qualified medical expenses not covered by group insurance. This includes copays and deductibles, and it may or may not include dependent care expenses.
Types of FSA
There are two plans for employers to choose from, and the employee, employer or both may contribute to the plan only after it has been established by an employer. Limits are established by the employer, if at all, and the maximum limit will be available for spending at the beginning of the year. In this sense, FSAs represent an advance contribution to healthcare expenses by the employer who is reimbursed throughout the year with pre-tax income withholdings.
A healthcare FSA is strictly for reimbursement of qualified medical expenses except insurance premiums and long-term care premiums. Dependent care FSAs is strictly to reimburse you for the cost of caring for a dependent resulting from your employment. Some examples include child care for dependents under the age of 13, senior daycare, and in-home nursing for a spouse judged incapable of self-care.
Account Management to Prevent Loss of Funds
One down-side to an FSA is that unused funds at the end of the year will be lost. These default to the employer and essentially constitute a reduction in pay. Hence, it is important to only contribute an amount to the FSA that you know will be used to cover medical expenses. Another drawback to these plans is that loss of employment means a loss of FSA funds, because they default to the employer.
The plan status, which refers to the amount an employee contributes over the entire year, cannot be altered except under one of two conditions. Employees are free to change their contribution total or drop out of the plan at the end of the year. Employees are also able to change their plan status with a change in family composition. This includes the addition or loss of at least one dependent.
Insurance typically pays the medical provider directly, but an FSA requires you to make the payment and then submit a claim. FSA providers will all have different rules and forms to follow, but they all include either a receipt or notarization by the service provider that the amount you are claiming is accurate.
Jeopardizing Existing Tax Credits
It is important to weigh the relative savings of using a dependent care FSA and the Child and Dependent Care Tax Credit. Money coming out of the FSA represents a tax deduction, which means it lowers the overall tax burden by reducing eligible income. Out-of-pocket expenses for dependent care are eligible for a tax credit, which subtracts directly from the tax burden.
FSAs can help in managing health expenses. They can also hurt your bottom line. Become familiar with the rules to get the most from your employment benefits.
Author Sara Roberts has a background in health and technical writing, and is a content contributor for Just Eyewear, an online retailer of prescription glasses and sunglasses. Visit Just Eyewear on Facebook.