Flexible Spending Accounts (FSA) are savings accounts of sorts which allow an employee to contribute a specific amount per year, before taxes are withheld, for out of pocket Health Care and Dependent Care expenses. The maximum amounts allowed for contribution are determined by both your employer and federal policy. Based on their needs, employees may elect up to $2500 (per household) of their annual salary for healthcare and $5000 (per household) for dependent care expenses to be placed into an FSA on a pre-tax basis.
There are three different types of accounts that can be offered by an employer through this program a Healthcare FSA, a Dependent Care Spending Account or a Limited Scope FSA. Contributions made to your FSA on a before-tax basis ultimately lowers your taxable income and may also decrease the amount of federal, state, local and FICA taxes you have to pay.
To take full advantage of your FSA, you should become aware of important factors that will assist in optimizing your investment into the account. This includes understanding when your company’s annual enrollment period begins, being aware of how your date of employment affects your eligibility to enroll, and also determining if any “qualifying event” (i.e. marriage, divorce, birth, or death of a dependent) triggers ability to participate.
Some employers set a deadline of Dec. 31 of each fiscal year to use the funds in a flexible spending account, but tax rules also allow employers to grant an optional two-and-a-half-month grace period. If you don’t spend the balance by then, you’ll forfeit it to your employer. Additionally, late last year, the Treasury Department announced new rules, which allow companies to permit employees to carry over as much as $500 that remains in their FSA at the end of a plan year, for use the following year. Employers have to choose between offering the carry-over option, or the grace period; they cannot offer both.
According to a March 2014 NYTimes.com article, here are some common questions asked regarding FSAs and new rules in place:
■ How do I know if I can carry over a balance from last year in my flexible spending account?
It’s important to check with your human resources department to learn your company’s policy, said Mr. Stover of Buck Consultants. Don’t assume that you can carry over a balance from last year, since companies aren’t obligated to allow it.