Employees can use funds from their flexible spending account to pay for qualified medical expenses.
A health flexible spending account, also referred to as a health flexible spending arrangement, is a special type of account established by an employer for the benefit of the employee.It allows employees to put aside funds for medical expenses not covered by insurance through convenient payroll deductions. Specific rules govern how these accounts are set up and how the funds are disbursed.
Function
Flexible spending accounts were designed to help employees pay for qualified out-of-pocket medical expenses not covered by insurance using pre-tax dollars. Since these funds are deducted from the employee's paycheck prior to taxes being taken out, the employee's taxable income is reduced, providing a net tax savings to the employee.
Features
Flexible spending accounts are a specific type of tax-advantaged health account. They should not be confused with health savings accounts, medical savings accounts or health reimbursement arrangements. Unlike health reimbursement arrangements, which are funded entirely by the employer, health flexible spending accounts are funded entirely by the employee. Unlike health savings accounts and medical savings accounts that allow carryover of contributions, the funds contributed to a flexible spending account must be used during the plan year.
Implementation
The amount of the employee's annual contribution to her health flexible spending account is determined by the employee at the beginning of the plan year. The annual contribution is divided by the number of pay periods in the year, and that amount is deducted from the employee's paycheck on a pre-tax basis. The entire annual amount selected by the employee is available to the employee for reimbursement at any time during the plan year, regardless of whether that amount has actually been contributed or not.
Benefits
Flexible spending accounts allow employees to use pre-tax dollars to pay for medical costs that would normally be paid with after-tax dollars and might not be deductible on the employee's income tax. This not only reduces the employee's tax liability, but he also has more money to put toward these expenses.
Considerations
Unlike other types of tax-favored health accounts, flexible spending accounts involve a use-it-or-lose-it rule. Any funds contributed to a flexible spending account that are not used by the end of the tax year are forfeited. Employers may not refund any contributions to the employee at any time. Funds in a health flexible spending account may not be used to reimburse the account holder for health insurance premiums, items that are covered by health insurance or for expenses involving long-term care.
Qaulified Expenses
Flexible spending account holders can use funds from their accounts for reimbursement for the same expenses that would be deductible as a medical or dental expense. These may include expenses paid for the account holder, the account holder's spouse and dependents. The IRS defines qualifying expenses as those costs incurred for the prevention, diagnosis and treatment of disease. Expenses may include costs associated with medical services, supplies and equipment. Rules governing qualifying expenses may change from time to time. The most up-to-date list of qualifying expenses can be found in IRS Publication 509 for the current tax year.
Limits
The amount of money that can be contributed to a flexible spending account is not limited by law or regulation, according to the Internal Revenue Service. Limits must be established by the employer's flexible spending account plan, and may be based either upon a maximum percentage amount or a maximum dollar amount. Account holders determine the amount they elect to contribute to their flexible spending account at the beginning of the plan year. The use- it-or-lose-it policy deters individuals from sheltering more money than they will use before the end of the year.
Tags: flexible spending, flexible spending account, spending account, spending accounts, plan year, savings accounts, account holder