Many companies offer a great workplace benefit known as a Flexible Spending Account (FSA) which can help decrease your federal income tax bill, while setting money aside to help pay for future dependent care and/or medical expenses. Most companies offer two types of accounts: a dependent care FSA and a medical FSA.
During your annual benefits open enrollment, you must designate how much you want to contribute to the account(s) for the upcoming year. To ensure you do not lose any money, it is important to base your contribution on an estimate of the qualifying expenses you expect to incur over the next year.
Look at your past expenses as a guide and adjust for any changes to your family size and/or known health issues to determine how much to put into each type of FSA account. The annual contributions to a FSA account are limited to the lesser of the mandated IRS limits or the employee’s or spouses total “earned income” for the year.
FSA deductions come out of your paycheck on a pretax basis; you do not pay federal income tax or employment taxes on the salary you contribute to your FSA. The law requires everyone to spend their FSA contributions by a certain date or forfeit the money which is why millions of dollars are lost each year; hence, the use-it-or-lose-it feature of these accounts.
Dependent Care FSA
A Dependent Care FSA is money set aside from each paycheck to help pay the cost of daycare, preschool, after-school care, and summer day camp for your dependent children while you’re at work. Also, this account will help pay the cost of care for your spouse or relative who is physically or mentally incapable of self-care as long as they live in your home and the care is done while you’re at work.
- According to the Society of Human Resource Management, the maximum amount an employee can contribute to a dependent care FSA is set by the employer as long as it does not exceed the IRS maximum which is $5,000 a year for individuals or married couples filing jointly.
- Married couples have a combined $5,000 limit, even if each has access to a separate FSA through his or her employer.
A Medical FSA is the most popular option, is money set aside to pay for medical costs such as co-payments, annual deductibles, prescriptions, vision care, eyeglasses/contacts, dental work, braces, chiropractic care, and other qualified medical expenses. One of the best benefits of the medical FSA is that you can use the funds to pay for qualified medical expenses even if you have not yet placed the funds in the account. The maximum contribution to the Medical FSA for plan year 2016 was $2,550 and will move to $2,600 for plan year 2017.
Some participants in the medical FSA are allowed to make claims against their accounts for up to two months and 15 days after the end of their benefit year. This grace period allows employees on a calendar benefit year to use their prior-year FSA contributions for expenses incurred as late as March 15 of the following year.
Furthermore, there are companies that allow their workers to roll up to $500 in unspent FSA funds into the next benefit year. Both of those modifications are optional and at the employer's discretion.
Check with your company to find out if it offers either of these options, so you know exactly by when you must use your FSA money. Some stores and/or pharmacies will even have a list of eligible products listed on their website. Click here to visit the Walgreens website for a list of their eligible products.