Also known as FSAs, they are tax-exempt accounts that can be used to pay for certain out-of-pocket health care expenses. Employees fund FSA accounts with every paycheck. To get reimbursements, employees can submit receipts for qualified medical expenses. FSA funds fall under the "use-it or lose-it" category. Money not spent by December 31 does not roll over to the next year's balance. Employers are limited to a maximum annual contribution of $2,650. Employees use FSA accounts to pay for copayments, coinsurance, prescription drugs, and over-the-counter medication. FSA funds may also purchase medical equipment, such as crutches, reusable wraps, and first aid kits.
Like a 401k or other savings account, an organization can make matching contributions to an employee's FSA account. They may also grant an extension of up two-and-a-half months for employees to access funds from last year or roll over up to $500 towards next year's account. Although Flexible Spending Accounts (or Health Savings Accounts) involve employees saving money from their paychecks to pay for medical expenses, each account has its own unique set of requirements and procedures. You will need to inform your employees about the differences between these accounts and which one you offer if your company offers them.
Working
FSA has one of the main benefits: the funds you contribute are taken from your earnings before taxes. This lowers your taxable income. Regular contributions to an FSA account can help reduce your tax liability. The IRS caps the amount that can be contributed annually to an FSA account. The annual contribution limit for medical expense FSA accounts is $2,750 in 2021 and $2850 in 2022.
Your spouse can set aside the annual contribution limit if you're married. Employers have the option to contribute to an FSA. However, they don't have to. If they do, it does not affect your ability to contribute. Employer contributions are not subject to tax. The contribution limit for dependent-care FSAs is $10,500 for individual and joint tax returns and $5,250 for married taxpayers who file separately. This increase was made possible by the American Rescue Plan of 2020. The contribution limit for 2022 is $5,000 for individual and joint tax returns and $2,500 for married taxpayers who file separately.
Advantages and Disadvantages
An FSA fund can be used to pay for medical care. This includes paid amounts to treat, prevent, mitigate, treat, or treat any disease or condition that affects any part of the body. The FSA does not reimburse expenses for cosmetic surgery or items and services that only benefit the general health of an individual, such as gym memberships. FSA owners, spouses, and dependents are eligible for medical expenses.
FSAs cover medical equipment such as bandages, crutches, diagnostic devices, and bandages. FSA funds can reimburse prescription medication expenses, including OTC drugs that you have a prescription for and insulin. In 2020, the Coronavirus Aid, Relief, and Economic Security (CARES Act) expanded the reimbursable qualified medical expense to include over-the-counter medications without a prescription. FSA funds were also allowed to be used to reimburse menstrual product costs. These CARES provisions can be used for any purpose. An FSA fund can also be used to pay for amounts paid according to insurance plan copayments or deductibles. The money cannot be used to pay insurance premiums.
Take Note
The FSA money must be used by the end of the plan year. A plan may allow you to use the funds for up to two and a half months after it is set aside. You may be able to roll over up to $550 annually of funds not used by the plan. Both options are possible, but the plan may only offer one. Any funds in your FSA that are not used within the grace period or at the end of the year will be lost. You should, therefore, carefully plan how much money you will put into your FSA account each year and how you intend to spend it.
The Internal Revenue Service announced that due to the impact of COVID-19, it would allow but not require employers that they amend their health plans so employees can change election dates that are usually allowed once per year. The IRS will also allow employers to modify FSA plans for 2020 or 2021 to give employees the option to change their elections. Normally, this is only allowed once a year.
