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FAQs: FSA

Overview

What is a health care flexible spending account (FSA) and how does it work?
A health care flexible spending account (FSA) allows you to set aside pre-tax dollars from your pay to cover eligible health care expenses (medical, dental, vision and hearing) for you and your eligible dependents. Your company may call an FSA by another name, such as a reimbursement account.

What are pre-tax contributions?
Contributions you make to an FSA are made on a pre-tax basis. This means your contributions are taken from your paycheck before federal, FICA, and most state and local taxes are withheld. You also get an immediate advantage from contributing pre-tax dollars: right in your paycheck. Each pre-tax dollar you contribute lowers your current taxable income, so you end up reducing the current federal income tax and FICA tax that you pay. In most cases, you’ll also pay lower state and local income taxes. Although pre-tax contributions reduce your current income for tax purposes, they don’t lower it for determining your company benefits that are based on pay.

Do I need to enroll to participate in an FSA?
Yes, you must enroll if you want to participate in an FSA. To continue participating after your initial enrollment, most plans require you to re-enroll each year during open enrollment. Your elections do not automatically continue from one year to the next.

How do I contribute to an FSA?
You fund your FSA(s) with pre-tax dollars that are deducted from your pay in equal installments throughout the year. Your plan will define minimum and maximum contribution amounts.

How do I estimate my health care FSA contributions?
To estimate your future expenses, first review similar expenses you’ve had over the last couple of years. Also consider any eligible health care expenses (medical, dental, vision or hearing) that you expect may occur during the year. It’s important to carefully estimate your expenses before you decide how much you want to contribute to the health care FSA each year. Be conservative in your estimate since you forfeit (lose) any balance that isn’t used by the claims filing deadline. On the other hand, if your expenses dramatically exceed the amount you contribute to the FSA, you miss out on some tax savings.

What are eligible expenses for the health care FSA?
To be an eligible expense for the health care FSA, it must be for a service that is: Medically necessary. For you, your lawful spouse, or anyone you claim as a dependent on your tax return Not reimbursed or is only partially reimbursed elsewhere, such as through an insurance plan covering you or your spouse Considered tax deductible by the IRS. In addition, these rules apply to the health care FSA: You cannot claim reimbursed expenses on your tax return as well If both you and your spouse are eligible for a health care FSA, you can each contribute up to the maximum to separate accounts.

When may I change my FSA contributions?
You may change your FSA contributions each year during open enrollment. Your plan may also allow you to change your contributions mid-year if you have a change such as marriage or becoming a parent.

How do I file a health care FSA claim?
To file a health care FSA claim: Obtain a claim form If expenses were partially covered by your or your eligible dependent’s medical, dental, vision or hearing plan, attach the Explanation of Benefits (EOB) you received from the health care company to your claim form. If expenses are not covered by insurance, include an itemized bill or receipt from the provider showing the: Patient’s name, Name of the provider, Type of service or product provided, Date the expense was incurred, Amount of the expense, and Provider’s signature Submit the completed claim form and documentation as instructed on the form.

When am I reimbursed for health care FSA expenses?
When you file a claim, you are reimbursed for the amount of eligible expenses in your claim up to the amount of your annual election, minus any previous reimbursements. Here’s an example. Sue elects to set aside $480 each calendar year ($40 a month) for her health care FSA. In January, she files a claim for a $50 prescription and is reimbursed for the $50. In February she buys trifocal glasses and has a surgical procedure. Her share of the February expenses is $600 and she files a claim for $600. Because her annual account balance is $430 ($480 total minus the $50 already reimbursed) she is reimbursed for $430. Her account is now empty for the rest of the year.

How do I file the claim if I have an expense late in the year, and don’t get the bill until the following year?
An FSA claim is eligible for reimbursement in the year in which it is “incurred.” An eligible expense is considered “incurred” on the date the service or treatment is provided, not on the day you pay for it. If the service or treatment will extend beyond the end of the year, only expenses incurred during the plan year for which you are contributing to your account will be eligible for reimbursement in that plan year. If you have FSA accounts in both years, you will file part of the claim against one year’s account and part against the next year’s account.

What happens to contributions left in my FSA at the end of the year because I didn’t file claims against them?
Because of the favorable tax treatment provided by the FSA, government regulations require that the money you contribute to your FSA only be used for eligible expenses incurred during that same year. However, you may submit claims for a given year up to your plan’s claims filing deadline (such as March 31) in the following year. Any money left in your account(s) after the claims filing deadline is forfeited. You cannot use one year’s contributions for the next year’s expenses.

Here’s an example. Joseph enrolls for an FSA and elects to set aside $500 a year. By the claims filing deadline of the following year, he has only filed claims for $450. He forfeits the $50 difference. He does not, however, lose the tax savings on that $50.

What happens to my health care FSA account if I stop working for my employer before the end of the year?
You may submit claims to your FSA account for eligible expenses incurred before your participation ended, up until the claims filing deadline in the following year. Most larger companies are required by the Consolidated Omnibus Budget Reconciliation Act (COBRA) to allow you to continue participation in your health care FSA for a limited period of time through COBRA.

However, if you are eligible for COBRA continuation, your future contributions will be in after-tax dollars and you may need to pay a 2% administrative fee. If you elect to continue your participation, you may submit claims for expenses incurred for as long as you participate in the health care FSA.

What happens to my FSA if I die during the year?
Your contributions to your FSA stop. However, until the claims filing deadline, your survivors can continue to file eligible expenses you incurred before your death.

My company offers both a health care FSA and a dependent care FSA and I participate in both. Can I shift money between my FSA accounts?
No. IRS regulations require the accounts to operate separately. You cannot use your health care FSA for eligible dependent care expenses, or the reverse.

FSA –Dependent Child Care

What is a dependent care flexible spending account (FSA) and how does it work?
A dependent care flexible spending account (FSA) allows you to set aside pre-tax dollars from your pay to cover eligible child/adult care expenses that allow you to work. By the way, your company may call an FSA by another name, such as a reimbursement account.

How do I estimate my dependent care FSA contributions?
To estimate your future expenses, first review similar expenses you’ve had over the last couple of years. Also consider any changes to your child/adult care needs that you expect may occur during the year. It’s important to carefully estimate your expenses before you decide how much you want to contribute to the dependent care FSA each year. Be conservative in your estimate since you forfeit (lose) any balance that isn’t used by the claims filing deadline. On the other hand, if your expenses dramatically exceed the amount you contribute to the FSA, you miss out on some tax savings.

What are eligible expenses for the dependent care FSA?
To be an eligible expense for the dependent care FSA, it must be: For care of children under age 13, or for care for your lawful spouse or other eligible dependent who is incapable of self-care For day care, babysitting and housekeeping related to this care For payments to relatives who care for an eligible dependent and who are not claimed as a dependent on your federal income tax return (including your child if the child is at least age 19 and not claimed as a dependent) For before- and after-school care programs, if the expenses are itemized separately from the tuition expenses

To allow you to work and, if you are married, to allow your spouse to work or attend school full-time In addition, these rules apply to the dependent care FSA: Reimbursed expenses lower the amount you can claim on the Federal Dependent Care Tax Credit Contributions may be limited depending on the employment status and income of you and your lawful spouse. Some financial planners suggest that if your family’s adjusted gross income is more than $24,000, you’ll probably save more in taxes by using the dependent care FSA. If your family’s adjusted gross income is $24,000 or less, you may be better off using the federal tax credit. Child/adult care tax worksheets are available from the IRS to help you determine which method is best for you. Also, you may want to consult a tax advisor about your own situation.

Are there expenses that are not eligible for reimbursement under the dependent care FSA?
Yes. Expenses that are not eligible for reimbursement under the dependent care FSA include:

Supplies, such as food, clothing or diapers
Tuition for education of an eligible dependent (including kindergarten)
Expenses for transportation to and from the care provider, or to pick up a baby-sitter
Expenses for which you use the Federal Dependent Care Tax Credit
Expenses for eligible dependents for whom you claim the Supplemental Young Child Credit
Expenses for overnight summer camps, health care expenses (reimbursable only through a health care FSA).

When may I change my FSA contributions?
You may change your FSA contributions each year during open enrollment. Your plan may also allow you to change your contributions during the year if your situation changes.

How do I file a dependent care FSA claim?
To file a dependent care FSA claim: Obtain a claim form. Attach an itemized bill or receipt from the care provider showing the: Name(s) of the eligible dependent(s) who received the service, Type of service provided, Date the expense was incurred, Name of the person or organization providing the service and the Social Security number, federal tax identification number or the nonprofit equivalent (special rules apply if you can’t obtain these numbers), Amount of the expense, and Provider’s signature. Submit the completed form and documentation as instructed on the form.

When am I reimbursed for dependent care FSA expenses?
When you file a claim, you are reimbursed for the amount of eligible expenses up to the current account balance remaining in your account (contributions to date minus any previous reimbursements). Here’s an example. Jose elects to set aside $480 each calendar year ($40 a month) for his dependent care FSA. In January, he files a claim for $30 and is reimbursed for the $30. In March he files a claim for $200 and is reimbursed for $50 ($80 contributions for January and February minus $30 claim already reimbursed. The $150 difference ($200 claim minus $50 reimbursed) remains an eligible expense and will be reimbursed as Jose makes more monthly contributions to his account.

What if I have an expense late in the year, and don’t get the bill until the following year?

How do I file the claim?
An FSA claim is eligible for reimbursement in the year in which it is “incurred.” An eligible expense is considered “incurred” on the date the service or treatment is provided, not on the day you pay for it.

If the service or treatment will extend beyond the end of the year, only expenses incurred during the plan year for which you are contributing to your account will be eligible for reimbursement in that plan year. If you have FSA accounts in both years, you will file part of the claim against one year’s account and part against the next year’s account.

Here’s an example. Joseph enrolls for an FSA and elects to set aside $500 a year. By the claims filing deadline of the following year, he has only filed claims for $450. He forfeits the $50 difference. Joseph does not, however, lose the tax savings on that $50.

What happens to my dependent care FSA account if I stop working for my employer before the end of the year?
You may submit claims to your FSA account for eligible expenses incurred before your participation ended up until the claims filing deadline in the following year. You cannot continue to make dependent care FSA contributions after you leave the payroll.