blogs

Don’t you wish you had a coupon or discount code for your dependent daycare costs or medical expenses? You know what? You do. It’s called a flexible savings account, or FSA. Also known as a cafeteria plan under Section 125 of the IRS code, it can be a discount worth up to your effective tax rate on these two types of expenses.

FSA’s take money out of your paycheck on a pre-tax basis and put it into either medical or dependent care buckets or accounts. As you incur claims throughout the plan year for qualified expenses, the funds are reimbursed to you avoiding taxation on these benefits. Because an FSA is a pre-tax benefit, there are some important rules you should follow.

Rule 1: Know your plan structure and plan maximums. Some FSA plans allow reimbursement payments to be made as soon as the claim is submitted (medical expenses). Other structures require the claim to be paid out over time as the funds are taken out of your paycheck each pay period (dependent care expenses).

Rule 2: Know what is covered and what is not. Overnight summer camps may not be considered a daycare expense for dependent care reimbursements. And items like cosmetic procedures or non-prescription vitamins may not be qualified medical expenses under your plan. Your HR or business office staff should be able to provide you with a list of covered expenses as part of the plan documents.

Rule 3: Know who is covered under your plan. In-home care for an elderly parent or sibling living with you may be reimbursable as dependent care. Look to Publication 503 from the IRS to define who would be a qualified dependent for this purpose.

Rule 4: Know your related expenses before you commit to the deduction. FSA amounts don’t rollover from year to year. They are use-it-or-lose-it buckets of savings. Say what? Yep, if you don’t spend the amount on qualified expenses that you put aside in your FSA account within the plan year or allowable grace period, it’s gone. No refunds here. So it’s better to err a little on the low side, or if you have records from previous years, calculate how much you have spent on these types of expenses to arrive at a more reliable amount.

Rule 5: Know what would happen if you leave your job for one reason or another during a plan year. If you have a large medical claim early in the plan year which was reimbursed by the plan and you left your job midyear, you could be liable for the difference between the amount that was collected through your payroll FSA deductions to date and the claim already paid.

FSAs are a great benefit, but do require some forethought and investigation of your available plan to be most useful. And because of the use-it-or-lose-it nature, be sure to ask your business office for a copy of your plan well before your required enrollment date so you can follow these FSA rules and avoid unpleasant surprises.