Guest Author - Rhonda Cliett
What is a Flexible Spending Account (FSA)?
A health care flexible spending account is a benefit offered through an employer which allows employees to use pretax dollars to pay for certain medical expenses that are not covered by insurance.
How does an FSA work?
An employee agrees to deduct a certain amount from his paycheck on a pretax basis. This amount is then placed into an account and used during the year to pay for qualified medical expenses.
The federal government previously ruled that the balance in the account must be used prior to the end of the year. However, current rules extend this limit to 2 months and 15 days after the end of the benefit year. This means that if the companys benefit year is the same as the calendar year, the deadline is March 15. It is important to note that an employer must amend its FSA policy to permit the extension. If not amended, then the previous rules apply and money in the account will be forfeited at the end of the benefit year. Check with your employer to find out what the deadline is for your account.
What does it mean to deduct money on a pretax basis"?
Actually, deducting the money on a pretax basis is the true benefit of the FSA. Here is an example (using fictional numbers):
Mary the Employee makes $30,000 a year. The amount of payroll taxes she must pay is based on the income of $30,000. As a result, after taxes she actually receives a paycheck for $25,000. However, Mary decides to sign up for an FSA and she agrees to contribute $200 a month (or $2,400 annually). Her taxes are now based on $27,600 ($30,000 - $2,400) which means she pays less in taxes. The end result is that her $200 monthly deduction might reduce her paycheck by only $150 because a smaller amount of taxes are withheld.
What type of expenses may be paid through the FSA?
You can use the FSA to pay for qualified medical expenses that are not covered by insurance. Listed below are some items that the IRS has deemed as qualifying expenses. Please note that limitations apply. Check with your employer for an updated list of items as well as specifics regarding limitations.
Acupuncture
Alcoholism treatment
Ambulance services
Artificial limbs
Artificial teeth
Bandages
Breast reconstruction surgery (following mastectomy for cancer)
Birth control pills
Braille books and magazines
Home improvements (capital expenses limitations apply)
Car special equipment such as hand controls (limitations apply)
Chiropractor
Christian Science
Contact lenses
Crutches
Dental treatment
Diagnostic devices
Disabled dependent care expenses
Drug addiction treatment
Eyeglasses
Eye surgery
Fertility enhancement
Guide dog or other animal
Health institute treatment
Hearing aids
Hospital services
Insurance premiums
Laboratory fees
Lead-based paint removal
Learning disability treatment
Legal fees
Lifetime care advance payments
Lodging incurred when receiving medical care
Long-term care
Meals
Medical conferences
Medical information plan
Medicines
Mentally retarded, special home for
Nursing home
Nursing services
Operations
Optometrist
Osteopath
Oxygen
Prosthesis
Psychiatric care
Psychoanalysis
Psychologist
Special education
Sterilization
Stop-smoking programs
Surgery
Telephone equipment
Television
Therapy
Transplants
Transportation
Tuition
Vasectomy
Vision care
Weight-loss program
Wheelchair
Wig
X-ray
