FSA

Health FSAs offer an option for setting aside money to use for qualified medical expenses. These accounts offer a convenient way to prepare for out-of-pocket medical expenses while saving on taxes. In addition, you can use your health FSA to pay not only for your medical expenses, but also for the medical expenses of your spouse and dependents.

Health FSA Advantages

Here are some of the advantages an FSA can provide:

Tax reductions: The amount you contribute to a health FSA is not subject to federal income tax or social security (FICA) tax—effectively adjusting your annual taxable salary. The taxes you pay each paycheck and collectively each plan year can be reduced significantly.

• Your employer can also contribute to your FSA, and this amount is also not considered taxable income to you.
• You can withdraw money from your FSA to pay for qualified medical expenses and your withdrawals are not taxed.
• You do not have to report FSA amounts on your income tax return.

Convenience: After the initial election at the beginning of the year, your employer will take care of transferring the allotted amount into your FSA through salary deferral.

Flexibility: You can withdraw health FSA funds at any time (for qualified medical expenses), even if the amount has not yet been deposited into the account, as long as the amount is no more than your elected annual deferral amount less any amount already used.

At the beginning of the year, you elect the total amount you want to have withdrawn from your paychecks to put into your FSA, and your employer will deposit the money into the account in equal allotments throughout the year. The IRS has outlined rules guiding eligibility, contributions and reimbursements.

FSA Eligibility

FSAs are employer-sponsored benefit plans, and the employer can choose what other type of group health plan coverage to offer with the FSA. FSAs can be offered with any type of health plan—FSAs are not tied to a high deductible health plan (HDHP) like health savings accounts (HSAs) are. Self-employed individuals are not eligible for an FSA, and restrictions may apply for highly compensated individuals or key employees.

Your FSA

The FSA is sponsored by your employer as one of your employee benefits. You will need to choose how much you want to contribute to your FSA. The amount you elect will be for the entire plan year, and your employer will then deduct the corresponding amount from your paycheck with each pay cycle. This is sometimes referred to as a salary reduction arrangement.

Contributions

After your initial contribution election, you ordinarily cannot change your election for a plan year during the year. Your elected contribution amount can only be changed if you experience a permitted election change event, such as a change in family status and your FSA permits you to change your election.

The amount you choose to transfer into your FSA should be based on the amount of qualifying medical expenses you anticipate your family incurring during the plan year. Start by looking at your family’s medical expenses for the past year and then determine whether your family will likely have those same expenses again and whether there will likely be any new expenses. Use this estimate to help you choose what amount you would like to contribute to your FSA, remembering that it is typically best to underestimate by a little than to overestimate and lose that money at the end of the year.

Limits – In 2016, the maximum amount you can contribute to your FSA is $2,550, which is indexed for inflation and therefore may change year to year. The employer may implement a lower annual limit than the federal maximum.

Who can contribute – Both you and your employer may contribute to your FSA. However, your employer is not obligated to contribute to the account.

The FSA operates with a use-or-lose rule, meaning if you don’t use the money in your FSA by the end of the plan year, you will lose it. However, the use-or-lose rule was relaxed with two options that employers may choose to offer: a grace period or a carry-over. The grace period can last up to 2 ½ months into the next year, typically March 15 for a calendar year plan. Generally, only expenses you incur during the plan year can be reimbursed from the funds in your FSA, but if your FSA has a grace period, you can use those unused funds in your FSA for expenses incurred during the grace period.

Under the carry-over option, an FSA may allow participants to carry over up to $500 in unused money at the end of the plan year to be used to reimburse expenses incurred in the next year. The carry-over does not count toward the annual maximum allowable contribution. Employers are not required to offer either of these options, and they may only offer one of the two options, not both.

If you have funds in your FSA at the end of the year, you might consider scheduling a checkup, dental cleaning or similar appointment before the end of the year in order to use up the leftover funds before they are lost.

FSAs must comply with a uniform coverage rule. The uniform coverage rule provides that an employee’s entire annual FSA election amount, less any amount already used, must be available at any time of the plan year—even if that full amount has yet to be contributed to the account. This means that the entire amount of your election is available for your use at any time of the year. For example, if you elect $1,000 for your annual contribution, and you incur qualified medical expenses of $800 in January, your FSA will reimburse you for the $800 even though that amount has not yet been deducted from your salary.

When you are paying for a qualified medical expense that you would like to use your FSA funds you will need to request reimbursement from our office

Reimbursement
To use your FSA funds you will  pay out-of-pocket and then submit receipts for reimbursement. Your account will have specific instructions for how to do this. When submitting for reimbursement, you will need your receipts and proof that what you paid for was an eligible medical expense; this is one of the reasons it is important to keep all receipts and related paperwork from your health care provider.

Employees may use their health FSAs to pay for or reimburse themselves for their own eligible medical expenses, as well as their spouses’ and dependents’ eligible medical expenses. Eligible medical expenses are unreimbursed medical care expenses, as defined under Section 213(d) of the Internal Revenue Code. An employer can more narrowly define the expenses that can be reimbursed from an FSA. Health FSAs cannot be used to pay for non-medical expenses. Your FSA cannot be used to pay for health insurance premiums, long-term care coverage or expenses, or amounts already covered under another health plan. See Appendix for a list of qualified medical expenses.

FSA eligible expenses

A POP plan allows employees to pay their portion of insurance premiums with pre-tax dollars. Benefits that are typically offered within a POP plan include health, dental, vision, accidental death and dismemberment, short- and long-term disability, and group life insurance up to $50,000.

POP Benefits

With a POP plan, employees have the option of choosing an amount of pre-tax salary that will be withheld from their wages for insurance premiums. Depending on the amount they elect, employees can save up to up to 40 percent on their payroll deductions due to savings on Medicare, Social Security and unemployment taxes (depending on the state). As a result, employees have more money to take home each pay period.
For employers, POP plans can decrease company payroll expenses and federal and state tax liabilities. For every dollar an employee contributes into a POP, employers save 7.65 percent on FICA taxes—a substantial financial savings. In addition, employee morale may improve since their take-home paychecks are larger.

POP Disadvantages

While POPs can save costs, it is important to be aware of the potential disadvantages of these plans for both employees and employers.

• Since a POP plan decreases an employee’s taxable income, it may also reduce other benefits, like Social Security, that are calculated using an employee’s income.
• Employers are responsible for the implementation and maintenance costs associated with a POP plan.
  • Often, the tax savings gained covers most or all of the cost of the plan administration. Still, administering a POP plan is another responsibility for already busy HR professionals.
• While POPs can offer tax savings to employees, they do not offer the same advantages of flexible spending accounts (FSAs), which allow employees to use FSA funds for qualified medical expenses in order to help offset their out-of-pocket costs. Employees may find POP plans to be less comprehensive than FSAs or other health care account options potentially offered at other companies.