Medical Flexible Spending & Dependent Care Flexible Spending Accounts
August 15, 2022
Medical Flexible Spending Account (Medical FSA)
A Medical Flexible Spending Account (Medical FSA) is an employer-sponsored account allowing employees to set aside pre-tax dollars to pay for eligible medical expenses. Employees don’t have to pay federal or FICA taxes on the money they contribute to their account, and many state taxes are also exempt. The plan year is any twelve-month period the employer specifies.
- Employees decide how much to contribute and control how best to spend their healthcare dollars up to the plan year maximum the employer specifies, not to exceed the IRS maximum. For 2022, the IRS maximum is $2850.00.
- Pre-tax contributions lower taxable income for employees.
- Employees can plan ahead for out-of-pocket expenses they know they’ll have, such as orthodontia or other major dental work, eyeglasses, and prescriptions.
- The employer can offer a 2.5 month grace period or a rollover (up to $570.00 for 2022), but not both.
How it Works
With a Medical FSA, employees save money by reducing their taxable income and budgeting for healthcare costs. The first step for an employee is to estimate their annual contributions carefully and make their election during open enrollment. Regular pre-tax contributions to the Medical FSA are deducted from their paycheck, pre-tax.
In this example, to show tax savings from the Medical FSA, the employee elected to have $100 withheld from his or her paycheck every pay period and deposited into an Medical FSA.
|Federal income tax – 25%||$25.00|
|State income tax – 5%||$5.00|
|FICA – 7.65%||$7.65|
|Tax Savings every paycheck||$37.65|
|Tax saving annually (26 pay periods)||$978.90|
Employees have access to their total election amount on day one of the plan year, even though they have not made all their pre-tax contributions. As an employer-sponsored benefit, the employer funds the reimbursement of expenses and recovers those funds throughout the plan year.
Dependent Care Flexible Spending Account
A Dependent Care Flexible Spending Account (Dependent Care FSA) covers qualified daycare expenses for children younger than age 13 and adult dependents who are incapable of caring for themselves. An example of an adult dependent would be an elderly parent not capable of self-care who has the same principal residence as the employee. Qualified expenses are those expenses required for the purpose of allowing the employee and, if married, their spouse, to be employed. Dependent Care FSA provides tax savings because employees don’t pay federal or FICA taxes on the money they put into their account, and many state taxes are also exempt. The plan year is any twelve-month period the employer specifies. The plan year maximum is $2500.00 for someone who is married, but filing taxes separately, and $5000.00 for someone who is married and filing jointly or who is a single parent.
- Employees decide how much to contribute up to the plan year maximum of $5000.00 (or $2500.00)
- Pre-tax contributions lower taxable income for employees
- Employees can plan for dependent care expenses
How it Works
With a Dependent Care FSA, employees save money by reducing their taxable income and budgeting for daycare costs. The first step for an employee is to estimate their annual Dependent Care FSA contributions carefully and make their election during open enrollment. Regular, pre-tax contributions to the FSA are deducted from their paycheck, pre-tax.
Unlike the Medical FSA, the total election amount of the Dependent Care FSA is not available day one of the plan year. Employees may only be reimbursed for expenses for the amount that is in their account at the time of claim.
- Dependent care expenses must be for child or elder care to allow the employee to work
- Must be for custodial care only
- Custodial care does not include expenses for food, clothing, or education
- If a daycare provides meals in addition to childcare and couldn’t be separated from the cost of care, it is considered an eligible expense
- Tuition and classes, as well as babysitters during non-work hours are not eligible
Who Benefits & Why?
Employers & Employees will both benefit from FSAs as both will see tax savings. The Medical FSA provides the participants a way to pay for many medical, dental and vision expenses and the Dependent Care FSA provides participants a way to pay for dependent care expenses both with pre-tax funds. The participants have access to the Medical FSA funds at the beginning of the plan year, while they only have access to the Dependent Care FSA funds in their accounts at the time of claim.
The Employer chooses an amount for the plan year maximums for both plans up to the IRS maximums:
Medical FSA IRS maximum is $2850.00 for 2022
Dependent Care FSA IRS maximum is $5000.00 for 2022
The Employee then chooses a plan year maximum up to the Employer’s maximum amount for the plan year. The deductions are processed, pre-tax, from the Employees’ pay in equal installments over the course of the plan year.
When Can We Get an Account?
Flexible Spending Plans can be implemented at any time during the year, generally for a 12 month period and most commonly on January 1st.
How Do We Start?
Contact Danielle or Tricia, with their information below!
Danielle Harrington, Senior Director of Administration | 617.354.0866 ext 13 | firstname.lastname@example.org
Tricia Acksen, Benefit & Payroll Administrator | 617.354.0866 ext 24 | email@example.com