Health and Dependent Care FSAs
Participants can take advantage of the tax benefits offered by Health or Dependent Care Flexible Spending Accounts to pay for eligible out-of-pocket expenses.
Tax advantages of Flexible Spending Accounts (FSAs)
Authorized by the IRS, FSAs are a great way for employees to gain significant tax advantages for out-of-pocket medical and dependent care expenses. FSAs allow participants to set aside money before taxes are withheld. As health care expenses or dependent care expenses are incurred throughout the year, participants submit a claim for those expenses and are reimbursed with tax-free dollars from the member’s account(s).
In addition, your employers are not required to pay Social Security taxes on their employees’ FSA contributions. Often, your clients’ tax savings will be greater than any costs associated with offering the FSA.
Participation in the Health and/or Dependent Care Spending Accounts serves to lower taxable income and requires members to pay less income taxes and save more money overall.
Two options to help with a variety of needs
There are two FSA options, and your clients’ employees can participate in either or both plans:
- The Health FSA reimburses out-of-pocket health care expenses for medical, dental, vision or hearing expenses.
- The Dependent Care FSA reimburses dependent care expenses required to allow participants to work.
How FSAs work
There is an open enrollment period where your clients’ employees can elect to participate in the Health and/or the Dependent Care FSA.
Once enrolled, here’s how it works:
- Participants estimate the amount to be spent on out-of-pocket health care expenses and/or dependent care expenses during the year and decide how much to set aside.
- The amounts to be set-aside for the FSA(s) are deducted directly from the employee’s paycheck in equal amounts each pay period on a “pre-tax” basis.
- As services and health care expenses or dependent care expenses are incurred throughout the year, participants submit a claim for the expenses and are then reimbursed from their account(s).
- Participants may file claims as often as they wish — weekly, monthly, etc.
- Any money left over in the FSA account at the end of the year is forfeited. Therefore, it is important that your employees carefully estimate their contributions. There is a runout period (typically three months) following the end of the plan year for employees to submit expenses incurred in the previous year.