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Britt Erica Tunick is an award winning financial journalist who has spent the past 17 years writing about virtually every aspect of finance. She has mastered the art of boiling down complicated financial topics for readers to understand. |
FSAs, flexible spending accounts, are an easy way for you to set aside a set pre-tax amount from your paycheck each week to be used for family child care. What to Know About Your FSA By Britt Erica Tunick Flexible spending accounts, allowing employees to set aside pre-tax dollars for eligible medical or child care expenses, are great! Just don’t let the word flexible fool you. Commonly known as FSAs, these optional benefit plans provided by many employers are one of the few perks the government still allows when it comes to taxation. Like most employer-sponsored benefit programs, employees have the option of signing up for FSAs at the time they start a new job, during their company’s annual open enrolment program, or at the time of a qualifying life change, such as marriage, divorce or the birth of a new child. During these designated periods, employees must designate how much pre-tax money they would like to contribute to their FSA for the coming year, an amount that cannot be altered for the year after it has been declared, regardless of any change in circumstances. That money is then deducted from your salary throughout the year, before it ever reaches your paycheck. FSAs are only good for one year and employees must re-enroll each year. On the face of it, FSAs are a no-brainer. If you go to a doctor even once each year, odds are that you’re going to face medical expenses, even if it is just your insurance deductible. The beauty of the FSA is that the money you set aside can even be used to pay an insurance deductible. But there are strict limits on how much money can be contributed to these funds each year and what the money contributed to them can be used for. One of the most important things to consider when determining how much to contribute to your FSA is the fact that any unused money in your fund cannot be rolled over to the following year and is essentially forfeited. Federal law limits annual contributions to medical FSAs to $2,500 per family member, and up to $5,000 per family for dependent care FSAs. For healthcare FSAs, the money set aside cannot be used to reimburse healthcare premiums or over-the-counter drugs and there are specific limitations within each plan regarding what costs are considered eligible. Despite these limitations, if you are able to forecast a ballpark number for the healthcare expenses your family is likely to face in the coming year, it absolutely makes sense to take advantage of an FSA if you employer offers one. And there is still a bit of flexibility in the plans. Though each FSA essentially exists for the year in which the money is contributed to it, in 2005 Congress approved a law that provides FSA holder an additional 2 ½ months after the end of each year to use up any remaining monies in their accounts. There is also a bit of flexibility in what can be deemed as being “medical,” enabling FSA holders who many not have needed as much money as they set aside to use their funds for non-conventional medical expenses such as massages or even prescription sunglasses. Determining how much to set aside for a dependent care FSA is usually a bit easier, given that many of these expenses are set costs such as daycare fees which can be known in advance. For both types of FSA it is important to note that the IRS bases reimbursements on the date that a service was provided, not the date it was paid for. In the case of childcare, that means you cannot put in a request for reimbursement until the end of the month your child has received care –even if you pay at the beginning of the month. It is also important to keep any and all receipts and documentation of services you will look to be reimbursed for. In addition to receipts and documentation for services rendered, most FSAs also require a corresponding insurance statement indicating how much of that expense was covered by medical insurance. |
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