FSAs are employer-based; self-employed individuals are not eligible. To participate, you usually must enroll through your employer each year, even if you do not want your deduction amounts to change from year to year. Employers generally offer enrollment during open enrollment periods when you enroll for the entire plan year. If you want to change or revoke your election before the end of the plan year, you typically can do so only if your plan permits a change due to circumstances in your employment or family status.
Before contributing to an FSA, you must first designate how much you want to contribute for the year, based on an estimate of your expected out-of-pocket costs. Your employer will then deduct amounts from your paycheck in accordance with your annual election. Although there is no IRS limit on the amount of money you or your employer can contribute to the accounts, each plan prescribes either a maximum dollar amount or a maximum percentage of your salary that can be contributed.
Some key considerations:
- You do not pay federal income tax or
employment taxes on the salary you contribute or on any amounts your
employer may contribute to the FSA. However, amounts contributed that are
not spent by the end of the plan year are forfeited. For this reason, it
is important not to overestimate the qualifying expenses you expect to
incur during the year.
- Eligible expenses include most of the
out-of-pocket costs not fully covered by your health plan, including
copayments, deductibles, vision care, prescriptions, dental care, tests,
and medical supplies, among others. Over-the-counter medications are no
longer eligible, except for insulin. See IRS Publication 502 at www.irs.gov
for a more detailed list of qualifying expenses.
- In order to use funds set aside in
your FSA, you must either submit claims for reimbursement or use the debit
card, credit card, or stored value card provided by the vendor overseeing
the FSA. For more information on reimbursement procedures or how to file
claims, talk to your employee benefits administrator.
Not for Everybody
Whether an FSA will suit your needs
depends largely on the out-of-pocket costs you expect to incur and how
accurately you can predict them. If you expect to incur no more than a few
hundred dollars over the course of the year, it may not be worth the trouble of
setting up an FSA. On the other hand, for those with predictable medical costs
or ongoing treatments that are not covered by an employer-sponsored medical
plan, an FSA can be a good way to set aside funds while lowering your tax bill.
Ultimately, the decision boils down to your particular circumstances and needs.
© 2011 McGraw-Hill Financial Communications. All rights reserved.
© Carmen Coleman, President and CEO
Lifetime Financial Group, LLC
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