Health Care Options: Using a Flexible Spending Account or Flexible Spending Arrangement

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Employees who have health plans care of their jobs can use what is called the FSA or the Flexible Spending Arrangement or Flexible Spending Account in order to cover the deductibles, copayments, drugs and health care expenses. Using the FSA reduces the taxes that they have to pay at the end of the day.

What is the FSA?

 A Flexible Spending Arrangement (also regarded as flexible spending account) is an account where anyone can put their money in so that they can use this to cover specific health care costs straight from their pockets. The FSA has no taxes. This means the individual can save a specific amount that is similar to the taxes that he or she paid on top of the money that was set aside.

To explain it further, this is a tax-advantaged account for financial purposes that are set up via what is called “cafeteria plan.” The FSA allows the employees to cast aside portions of the earnings that the policyholders pay the qualified expenses that come in the form of the plan. Money that is deducted from the pay of the employee and then to an FSA is not included in the payroll taxes. This results in substantial payroll and tax savings.

There was a disadvantage when using the FSA before the Affordable Care Act. The funds that were not used will be forfeited by the employer at the end of the year. That is why employees are encouraged to use the FSA, rather than lose it. When reading the terms that are stated under the Affordable Care Act, an employee can carry the amount of a maximum of $500 over to the next year and not have to lose the funds.

Employers can make contributions to the FSA of their employees but it is not a requirement.

Facts About the FSAs

 FSAs come with a limit of $2,600 every year for every employer. If the individual is married, then the individual’s spouse can get a maximum of $2,600 in the Flexible Spending Arrangement with the employer as well.

  • The funds in the FSA can be used to pay for specific dental and medical expenses for the individual, the individual’s spouse if married and the dependents, if there are.
  • FSA funds can be spent to pay copayments as well as deductibles but not for premiums on insurance.
  • FSA funds can also be spent on prescription drugs, along with medicines that are ordered over the counter with the prescription from a doctor. Insulin reimbursements are also allowed even without prescriptions.
  • FSAs can also be used to cover the costs of medical equipment such as bandages, crutches, and diagnostic devices specifically blood sugar kits.

 

Limits, Carry Overs and Grace Periods of the FSA

 Policyholders must utilize the money obtained from an FSA within the year that it was set for. However, the employers of these individuals usually offer these two options:

  • FSA provides a specific “grace period” that can last up to 2 and ½ months in order to use as much money in the FSA.
  • The FSA also allows the policyholder to carry over a maximum of $500 every year that can be carried over to the incoming year.

Employers of policyholders can offer one of these two options. However, it is not possible that they offer both. In fact, it is not even a requirement to offer one of these.

Toward the end of the year of the grace period that is given, the policyholder can lose all the money that remains in the FSA. It is very important that the individual also plans carefully and not allocate any more money in the FSA than he or she thinks can spend within that particular year on expenses such as coinsurance, medicine, copayments, and other possible health care expenses.

Another important thing to note about the FSA is that it cannot be used alongside a plan from the Marketplace. The Health Savings Account or the HSA allows the policyholder to cast aside money on a pre-tax basis in order to pay health expenses if there are high deductibles in the Marketplace health insurance plans.

Types of FSA

 A number of cafeteria plans can offer two major FSAs that focus primarily on dependent and medical care costs. There are a couple of cafeteria plans that are offered to the other kinds of FSAs. It is important to note that participation in one kind of FSA cannot affect participation in other kinds of FSA. However, the funds in FSA can be transferred from one to another.

The most common kind of FSA is utilized to pay for the dental and medical expenses that were not covered by the insurance. These are usually the copayments, deductibles, and coinsurance for the health plan of the employees.  As of the 1st of January 2011, medications that are ordered over-the-counter are only allowed when bought with a prescription from the doctor, with the exception of insulin. Medical devices that can be ordered over the counter like crutches, bandages and repair kits for the eyeglasses are also allowed.

Prior to the Affordable Care Act, the IRS has permitted employers to enact the maximum election for the employees. Affordable Care Act has also amended what is known as Section 125 to state that FSAs cannot let the employees choose the annual election that exceeds the limit that is determined by the IRS. The yearly limit can reach $2,500, especially for the first year. The IRS can also index the plans in the subsequent years especially for the adjustments in the cost-of-living.

Employers can also opt to limit the annual elections even further. This specific limit can be applied to every employee, even without regarding the status of the employee – if he or she is married or have children or not. The contributions that are non-elective and made by employers that are not subtracted from the wages of the employees are also not added to the limit. An employee who is employed by various and multiple unrelated companies and employers can also opt to reach the limit of each employer plan. The limit also cannot apply to the HAS as well as the health reimbursement arrangements or even the share of the employee on the cost of the sponsored health insurance care that is provided by the employer.

There are also employers who choose to just issue debit cards to employees who are qualified participants of the FSA. These participants can also use their debit cards in order to pay for the eligible expenses because they are part of the FSA. Grocery stores and pharmacies that opt to go for debit cards as a mode of payments have the option to not allow transactions when the participants try to pay for the items that they buy which are not qualified under FSA. Other than that, employers should require their employees to show the itemized receipts as proof for every expense that they charged using the debit card. The IRS can also let the employers waive the requirement in the situation that an individual resorts to the debit card at the grocery store or the pharmacy and comply with the procedure that is stated above. The IRS can also let the employer waive this specific requirement when the amount that is charged using the debit card has eventually become multiple forms of co-pay for the benefit of the group insurance plan for the health care of that employee. There are also cases wherein the administering firm of the FSA prefers the actual insurance. The EOBs or the Explanations of Benefits can represent the portion of the patient on the medical expenses as well as other required documentation. This is a requirement that has become less and less cumbersome especially when there are more insurers that let the patient look for the EOBs on the websites.

 

Dependent Care FSA

 

FSAs are also established to pay certain expenses in order to care for the dependents especially when the legal guardian is busy at work. This can pertain to child care, especially for children who are below the age of 13. This kind of FSA can also be used for the benefit of children, regardless of age, who are mentally or physically incapable of taking care of themselves. This also covers adults and senior citizens who are dependent. In addition to this, the individual or individuals who use the funds on the dependent care are regarded as dependents on the federal tax return of the employee. The funds can also not be utilized for summer camps, with the exception of days camps, or for the long-term care of parents who reside somewhere else, aside from the nursing home that is covered by the insurance provider.

 

The FSA for the dependent care is capped federally at the amount of $5,000 for every year and for every household. Spouses can opt for an FSA but the combined amount that they can obtain must not go beyond $5,000. During tax time, each and every withdrawal that is over $5,000 can be taxed.

 

The difference with medical FSAs is that dependent care FSAs are also not funded early on. This means employees do not have access to receive some kind of reimbursement in the exact and full amount from the contribution that is made since day one. Employees only have the option to reimburse up to a particular amount and they can also deduct that during the entire year.

 

If the spouses are married then they can earn the income from the Dependent Care FSA. There are exceptions such as the spouse who does not work is also disabled or currently studying full time. If one spouse earns lower than $5,000 then the benefit amount of the FSA is limited to the amount that the spouse earns.

Other FSAs

 There are also FSA plans for sponsored premium and non-employer reimbursements on parking as well as transit reimbursement. The individual account for premium health insurance lets the employee pay for the spouse’s insurance using pre-tax dollars, for as long as there is coverage that is sponsored by a non-employer. This is also considered as an individual plan and billed directly to the individual or his or her spouse. Transit and parking accounts also let the employees cover the parking expenses along with the expenses for public transit using pre-tax dollars but only up to specific limits. It may not be as common as the other FSAs listed above but there have also been a number of employers who have opted to offer assistance in any form of adoption through the FSA. An individual cannot also have health care from the FSA if she or he does not have the HDHP or what is also known as the High Deductible Health Plan that comes with the HAS. In situations such as the employee has both the FSA as well as the HDHP along with the HAS, then he or she can be qualified for what is known the LEX or the Limited Expense FSA. This is also known as the Limited Purpose FSAs. These FSAs can be used in reimbursing vision and dental expenses, no matter the deductible stated in the plan as long as it is at the discretion of the employer and the medical expenses that were incurred are eligible and qualified as soon as the deductible has been met and also reimbursed.

Coverage Period

 The coverage of the FSA can end at the time that the plan year ends for just as a single plan or when the coverage of a particular individual has also ended. An example is when there is a loss of coverage because the employee has resigned from the position where he is governed by that employer.

This means that the person who is employed by the company during a given period is only covered when he is with the company. He cannot continue his coverage beyond that.


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  • Health Care Options: Using a Flexible Spending Account or Flexible Spending Arrangement
  • Sanjiv Gupta CPA