Bear Mountain Capital Inc.

Uncommon Employee Benefits: Flexible Spending Account

| April 9, 2019

Blog | Planning Perspectives

When someone starts a new job, there is generally an onboarding process. Part of this process usually includes enrolling in employee benefits such as medical plans, insurance plans, and retirement benefits. Most of us are familiar with the benefits of 401(k)s, and some of us are familiar with the ins-and-outs of health savings accounts or HSAs (if you’re not, see a refresher here). Increasingly, companies are beginning to offer another type of employee benefit known as the flexible spending account, or FSA.

The main benefit of an FSA is money contributed to the account is deducted from your pay on a pre-tax basis, reducing your taxable income. Employees enrolled in this benefit can use these tax-free dollars throughout the year on eligible out-of-pocket expenses. If an employee has an effective tax rate of 30%, it’s as if they’re saving about 30 cents on every dollar spent from this account. There are three types of FSAs:

  1. Health Care FSA – this account can be used to pay for eligible medical, dental, vision, hearing, and prescription drug expenses.
  2. Dependent Care FSA – this account can help pay for eligible child and adult care expenses like day care, before and after school care, nursery school, preschool, and summer day camp.
  3. Limited Purpose FSA – this account will help pay for eligible dental and vision expenses. Eligible expenses may also include prescriptions, over-the-counter items and other health expenses based on the plan. Employees will use this plan if they also have an HSA.

How would an FSA work for you? It’s quite simple. You contribute, spend and save:

Contribute – estimate the amount you expect to spend during the plan year on eligible out-of-pocket expenses. Select the FSA plan that’s right for you and choose how much you want to contribute. Your employer will deduct that amount from your paycheck in equal amounts each pay period. These deductions are pre-tax. Each FSA has its own contribution limit, which is set by the IRS. Below are the 2019 limits:

  • Health Care FSA – $2,700
  • Dependent Care FSA – $2,700
  • Limited Purpose FSA- $2,700 (Note: your employer may set a lower limit. You should check your plan to know how much you can contribute.

Spend – once funds are in your FSA, you can use your FSA account debit card (if offered by your employer) to pay for your eligible expenses. Or you can simply pay out of pocket and then submit a reimbursement claim.

Save – your FSA contributions are tax-free. When you use your FSA funds on eligible expenses, you save your effective tax rate on every dollar you spend. If you are effective tax rate is 30%, that translates to a 30% savings on your normal out-of-pocket expenses.

Key takeaways on flexible spending accounts (FSAs):

  • Established by an employer.
  • Usually funded by employees pre-tax payroll deduction, employers can also contribute.
  • Can be used in conjunction with any type of health insurance (Note that HSAs require HDHP coverage).
  • FSAs funds are “use it or lose it”, meaning money not used by the end of the year is forfeited, although employers can allow enrollees to carry over up to $500 to the next year.
  • All contribution amounts are immediately available for use (after the first contribution is made).  If an employee uses the full amount and then quits or is terminated prior to the end of the year, FSA funds do not have to be paid back to the employer.

We all have out-of-pocket expenses throughout the year. If your employer offers a flexible spending account, consider if it provides the benefits that fit your needs. The savings can add up.