FSAs, HSAs, DCAs, Oh My!
Published on : Nov 11 2013
Understanding the Flexible Spending Account (and all those other SAs)
Flexible spending accounts or flexible spending arrangements (FSA) are one of a number of employer-sponsored cafeteria plans structured to help employees use a portion of their earnings to save pre-tax dollars to pay cover non-covered health care expenses like deductibles, coinsurance or over-the-counter medically qualified items.
How do FSAs work?
Flexible Savings Accounts (FSA)
FSAs are elected by employees and can be deducted from payroll on a pre-tax basis. In 2013 the federal maximum for FSAs was $2,500, regardless of whether the employee is single or has family. If married, both can hold FSA accounts with their employers for a total not exceeding $5,000. The IRS will index each year for cost-of-living and inflation adjustments. A recent ruling (October 31, 2013) The only drawback with FSAs is the use-it-or-lose-it rule which held employees to making shrewd estimates for their annual contribution, or they would lose any remaining balance at the end of the plan year. Remaining dollars are returned to the fund administrator to cover administration cost, but cannot legally be returned to the employee. Depending on the plan administrator, some FSA plans have a grace period of up to two and half months after the end of the plan year to make qualified purchases or submit receipts for reimbursement. FSA funds are also often available via a debit card, which can be used at the point of sale, or deposited directly into an employee’s bank account.
Health Savings Accounts (HSAs)
HSAs and Health Reimbursement Accounts (HRAs) can only be used with high deductible health plans (HDHP), consumer-driven health insurance plans. These accounts, unlike FSAs, do not have a use-it-or-lose-it feature and can roll the remaining funds from one year to the next. The funds can also only be used as they accrue and not in advance of deposits made.
Dependent Care FSA
FSAs can also be established to help pay for expenses related to the care of dependents while the employee is at work. Not just used to cover childcare expenses for children under the age of 13, the dependent care FSA can also be used for children of any age who are physically or mentally incapable of self-care, and those dependents who live with the employee such as parents or grandparents requiring adult day-care. The IRS mandates that dependent care funds must be spent on individuals claimed as a dependent on the employee’s tax return. Additionally, the funds cannot be used for ‘summer camp’ or long term care for ailing parents. Another little known limit of the dependent care FSA is that for married couples, both individuals must work. If one spouse earns less than $5,000 the benefit is then limited to whatever that spouse earned in the tax year.
Limited Purpose FSA
A limited purpose FSA or limited expense (LEX) if an employee has a high deductible health plan with an HAS attached, they may be eligible for a limited purpose FSA. The FSAs may only be used to reimburse dental and vision expenses, regardless of the plan’s deductible
Parking and Transit FSAs
Great for those employees who live in a highly populated city area, Parking and Transit FSAs are two separate accounts whose funds are solely used to pay for parking, public transportation and commuting costs with pre-tax dollars.
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Please be advised that, based on current IRS rules and standards, any advice contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty that the IRS may assess related to this matter. Any information contained in this article, whether viewed or subsequently printed, cannot be relied upon as qualified tax and accounting advice. Any information contained in this article does not fall under the guidelines of IRS Circular 230.
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