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As promised in our previous newsletter, during the following weeks, we are going to acquaint you with different health care accounts that are typically offered to employees for medical expenses not covered by the health insurance.
For instance, the Health Savings Account (HSA) is a tax- advantaged medical savings account available to American taxpayers enrolled in a high-deductible health plan.
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The Health Reimbursement Arrangement or Account (HRA) is also an employer- funded health benefit plan that reimburses employees for out-of-pocket medical expenses.
And there is also the Flexible Spending Account or Arrangement (FSA) which may be offered in conjunction with other employer-provided benefits as part of a cafeteria plan. The FSA is, obviously, our topic for this week.
With this plan, employers have complete flexibility to offer various combinations of benefits in designing their plan. It is important to mention that self-employed persons aren’t eligible for FSAs.
There are several benefits you may enjoy from your FSA:
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- Contributions made by your employer can be excluded from your gross income;
- No employment or federal income taxes are deducted from the contributions;
- Withdrawals may be tax free if you pay qualified medical expenses;
- You can withdraw funds from the account to pay qualified medical expenses even if you haven’t yet placed the funds in the account;
- Can be paired with other HSA and HRA accounts.
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| The qualified medical expenses are those specified in the plan that generally would qualify for the medical and dental expenses deduction according to the IRS’s Publication 502, Medical and Dental Expenses. Although the publication hasn’t been updated for 2019 until now, there aren’t many changes expected regarding these regulations. |
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| A medicine or drug will be a qualified medical expense for FSA purposes only if the medicine or drug: |
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- Requires a prescription,
- Is available without a prescription (an over-the- counter medicine or drug) and you get a prescription for it, or
- Is insulin.
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| Medical care expenses include payments for the diagnosis, cure, mitigation, treatment, or prevention of disease, or payments for treatments affecting any structure or function of the body, including co-pays, deductibles and a variety of medical products and services ranging from dental and vision care to eyeglasses and hearing aids. |
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Qualified medical expenses may be incurred by you, your spouse, all dependents you claim on your tax return, or your child under age 27 at the end of your tax year.
FSAs are usually funded through voluntary salary reduction agreements with your employer. You can contribute to your FSA by electing an amount to be voluntarily withheld from your pay by your employer. No employment or federal income taxes are deducted from your contribution, and the employer may also contribute to your FSA if specified in the plan.
At the beginning of the plan year, you must designate how much you want to contribute. Then, your employer will deduct amounts periodically (generally, every payday) in accordance with your annual election. You can change or revoke your election only if there is a change in your employment or family status that is specified by the plan.
Contributions to a FSA are limited by the IRS to a certain amount which is indexed for inflation and may change from year to year. The annual limitation for 2018 was $2,650 and for 2019 the annual limitation is $2,700.
Employers have the option to limit their employees' annual elections further. Your spouse can make a similar contribution to her FSA if you're married. An employee employed by multiple unrelated employers may elect an amount up to the limit under each employer's plan. |
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Non-elective contributions (funds employers choose to direct toward their eligible workers) made by the employer that are not deducted from the employee's wages are not counted against the limit.
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Generally, distributions from a health FSA must be paid only to reimburse you for qualified medical expenses you incurred during the period of coverage.
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You must be able to receive the maximum amount of reimbursement (the amount you have elected to contribute for the year) at any time during the coverage period, regardless of the amount you have actually contributed. The maximum amount you can receive tax free is the total amount you elected to contribute to the health FSA for the year.
You must provide the health FSA with a written statement from an independent third party stating that the medical expense has been incurred and the amount of the expense.
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You cannot receive distributions from your FSA for the following expenses:
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- Amounts paid for health insurance premiums;
- Amounts paid for long-term care coverage or expenses;
- Amounts that are covered under another health plan.
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You must also provide a written statement that the expense hasn’t been paid or reimbursed under any other health plan coverage. The FSA can’t make advance reimbursements of future or projected expenses.
Debit cards, credit cards, and stored value cards given to you by your employer can be used to reimburse participants in a health FSA. If the use of these cards meets certain substantiation methods, you may not have to provide additional information to the health FSA.
It is interesting to mention that the participating employee's entire annual contribution is available at the start of the plan year, commonly January 1, or after the first contribution to the FSA is received by the FSA vendor, depending on the plan.
Therefore, if the employee experiences a qualifying event during the first period, the entire amount of the annual contribution can be claimed against the FSA benefits. If the employee is terminated, quits, or is unable to return to work, he or she does not have to repay the money to the employer. |
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Flexible spending accounts are generally “use-it-or-lose-it” plans. This means that amounts in the account at the end of the plan year generally can’t be carried over to the next year. However, the plan can provide for either a grace period or a carryover.
The plan can provide for a grace period of up to 21⁄2 months after the end of the plan year (until March 15 of the following year). If there is a grace period, any qualified medical expenses incurred in that period can be paid from any amounts left in the account at the end of the previous year. Your employer isn’t permitted to refund any part of the balance to you.
Plans may allow up to $500 of unused amounts remaining at the end of the plan year to be paid or reimbursed for qualified medical expenses you incur in the following plan year. The plan may specify a lower dollar amount as the maximum carryover amount. If the plan permits a carryover, any unused amounts in excess of the carryover amount are forfeited. The carryover doesn’t affect the maximum amount of salary reduction contributions that you are permitted to make.
A plan may allow either the grace period or a carryover, but it may not allow both.
More information about FSAs can be found in Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans, available on IRS website.
There is another kind of flexible spending account, the Dependent Care FSA, which is also a pretax benefit account used to pay for dependent care services such as day care, preschool, summer camps and non-employer-sponsored before or after school programs. Funds may be used for expenses relating to children under the age of 13 or dependents incapable of self-care who live with the account holder more than half the year.
The contribution limits for dependent care FSAs are of $5,000 for married filing jointly, or $2,500 for other filing status and are the same for tax years 2018 and 2019. The amount can be funded by the employer, the employee, or both. All funds not used by the end of the grace period of March 15th are forfeited.
In addition to dependent and child care expenses, a dependent care FSA can be used for adoption assistance. |
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Because eligible employees need to decide how much to contribute through payroll deductions before the plan year begins, many employers are offering their employees the option to sign up for an FSA during fall for participation that begins the following year. Check with your employer and/or the FSA administering firm to find out all the details of the plan mainly on eligible expenses and claim procedures.
Make sure to keep close track of all your qualified medical spending throughout the year, so you can take advantage of the benefits the plan has to offer without wasting any of the contribution. |
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