Tax Benefits Of An Hsa For Employers
For employers, there are several tax benefits associated with offering an HSA plan for their workers. Employer contributions are not subject to payroll taxes or income taxes as long as they dont exceed certain limits set by the IRS each year. Additionally, any interest earned on investments will be exempt from taxes as long as they remain in the HSA account until they are withdrawn. Plus, employees who use an HSA typically need fewer sick days and are more productive due to better healthcare management.
Flexible Spending Accounts Are Back To Use
AILSA CHANG, HOST:
During the depths of the pandemic, the IRS allowed Americans to roll over the balances in their health flexible spending accounts. A health FSA lets employees spend pretax money on health-related expenses. But this year, it’s basically back to use it or lose it again. And Kenny Malone from our Planet Money podcast has this cautionary tale.
KENNY MALONE, BYLINE: Regina Acheampong got the fateful email a few weeks ago from her company’s HR department.
REGINA ACHEAMPONG: Hey don’t forget you have, you know, money in your FSA. And if you don’t use it, you lose it. And then it was like the light bulb went off for me.
MALONE: A light bulb that said, uh-oh, how much did I put in my FSA?
ACHEAMPONG: I logged in, and it showed my balance of, like – it was a little over $2,000. And I was just like, uh-oh.
MALONE: Two thousand dollars?
MALONE: Oh, no.
ACHEAMPONG: Yeah. So…
MALONE: So in Regina’s case, she had to spend or lose $2,000 on health stuff in, like, a month.
ACHEAMPONG: So I literally solicited some guidance on Twitter – what am I going to do with this?
MALONE: With this $2,000 – and one of the first Twitter responses? Regina’s brother, actually.
ACHEAMPONG: My brother was like, hey I need another massage gun because I don’t know what happened to mine.
MALONE: Why not? In the shopping cart.
ACHEAMPONG: Then my mom said she wanted to try using a body pillow ’cause I use them. I got her one, and then I got…
BANK: Company cars.
BANK: Retirement funds.
Employers Commuter Benefits Programs
Though not technically an FSA, some employers offer commuter benefits that include pre-tax savings of up to $300 a month that may be used for public transportation or parking for work. These benefits are for the employee only and do not cover spouses or dependents.
You can use an FSA to pay for everyday medical and healthcare costs. Theres a wide range of items that are FSA-eligible. This includes:
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Expenses That Qualify For Fsa Reimbursement
Once you deposit money into an FSA, you can begin using those funds toward reimbursement for qualified expenses. You can only use the money for bills that meet the IRS definition of eligible dependent care service. This means that the services must be necessary for you and/or your spouse to work and earn an income.
Qualified expenses include:
- In-home care, such as a nanny, babysitter , or au pair, or institutional-setting care, such as child or adult daycare services, by qualified caregivers
- Summer day camps
- Transportation provided by a caregiver
- Application fees, deposits, etc. required for obtaining care, but only if care is subsequently provided
IRS Publication 503: Child and Dependent Care Expenses outlines expenses that qualify for FSA reimbursement.
The IRS issued a statement notifying taxpayers that at-home COVID-19 tests and personal protective equipment such as face masks and hand sanitizer are both considered eligible medical expenses that can be paid or reimbursed under FSAs.
Are There Any Risks To Having An Fsa
An FSA isnt the right choice for everyone. There are some risks involved in using this healthcare option. These include:
- The money does not roll over: You need to use the money in your FSA each year. Some employers offer small grace periods, but as a rule, you need to use the money in a calendar year. If you dont, youll lose all the money youve contributed.
- FSAs are tied to your employer: Your FSA is tied to your employer and your companys health plan. This means that although your FSA is yours, you wont be able to keep it if you leave your job for any reason. The money you have in your account will be lost.
You can learn more about FSAs by reading the answers to common questions.
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What Are The Benefits Of Having An Fsa
There are multiple benefits to an FSA. They offer several advantages that can make them a good choice in some situations. Benefits of FSAs include:
- The money is tax-free: Since youre spending money you werent taxed on, youre getting substantial savings when you use FSA funds.
- You can borrow against an FSA: With nearly all employers, your FSA works like a line of credit each year. This means that if you have a large expense in March, youll be able to use an entire years worth of FSA funds toward paying it. You can then pay it back by paying into your account for the rest of the year.
- The money is set aside for medical expenses: Having money set aside for medical expenses means you can count that money being there for those important healthcare needs.
- Your employer can contribute: In some workplaces, there are employer contributions toward FSAs. If your company offers this benefit, you can get even more value from your FSA.
What Is An Fsa
An FSA is a savings account that helps employees cover health-related costs that are not included in their insurance plans.
The specifics vary, but such plans generally can be used for expenses like deductibles and co-payments, or for health-related items like prescription glasses. Some can be used for alternative treatments like acupuncture. With a doctor’s prescription, you may be able to use the FSA to help pay for a gym membership or massage therapy.
First aid products are generally covered, including items like bandages. Many over-the-counter medications and remedies are covered, but only if you have a doctor’s prescription for them. These include common products like:
- Ear wax removers
Someone at the IRS presumably made lists of which common household items are health products and which are merely healthful products. Vitamins and herbal remedies are not covered, nor is plastic surgery or teeth whitening.
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How Should I Keep Track Of My Eligible Expenses
You should keep all your receipts and pertinent documentation to prove your Health Care FSA was used for eligible medical expenses. If you pay for anything other than eligible expenses with your Health Care FSA, the amount will be taxable, and you will be required to repay the amount or pay an additional tax penalty.
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Dependent Care Assistance Account
The Dependent Care FSA is for employee expenses related to the cost of dependent care while the employee is at work . Eligible dependents must be under the age of 13. Tax dependents age 13 and older are also eligible if they are physically or mentally incapable of self-care and reside in the employees home at least half the year.
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Take Control Of Your Healthcare Costs
Employers that offer HSAs allow their employees to control their healthcare costs and make smart decisions about using their HSA funds each year. In addition, employers can contribute funds to each employees HSA account, which helps employees save up for future medical expenses. This kind of investment into HSA accounts can lead to tax breaks for employers and employees.
Fsas Would Confer A Tax Savings For Many But Not All Members With Eligible Expenses
- The HCFSA option would confer a savings to service members, but the DCFSA would not do so in all cases because FSA contributions interact with other components of the U.S. tax code, such as the Child Tax Credit and Earned Income Tax Credit. Therefore, FSA contributions affect how much of these credits can be claimed and the tax liability of the taxpayer.
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Is Opening An Fsa Worth It
Did you read through the list of FSA-approved expenses and see something familiar? If you found items or services you know you’ll need in the upcoming year, an FSA could be worth opening.
Remember, these expenses could be incurred by you, your spouse, or your dependents. By opening an FSA, not only will you save money by lowering your taxable income. But you will ensure that the money is socked away for when you need it during the plan year.
Be cautious because you could lose money left in your account on the last day of your plan. To avoid this, make sure you choose your funding election carefully.
There are only two cases where left-over funds could still be used after the last plan day. And only if your employer allows it.
First, employers can allow you to roll over up to $550 of your contribution in 2020 to 2021. Or, they could permit a 2.5 month grace period for you to use the remaining contribution. Either way, be sure to select your FSA contribution carefully so you don’t lose any contributions at year-end.
Also, be sure your monthly household budget can afford the FSA contribution you elect. This is important because you wont be able to change these elections until the following open enrollment period. Or unless you experience a qualifying life event like marriage, the birth of a child, or the death of a dependent.
Dependent Care Fsa Limits For 2022
The Internal Revenue Service limits the total amount of money that you can contribute to a dependent care FSA. The 2021 dependent care FSA contribution limit was increased by the American Rescue Plan Act to $10,500 for single filers and couples filing jointly and $5,250 for married couples filing separately . For 2022, the dependent care FSA limit returns to $5,000 for single filers and couples filing jointly, and $2,500 for married couples filing separately.
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What If My Spouse Is Enrolled In A Different Health Insurance Plan
You can use funds from your healthcare FSA to pay for eligible medical costs for both your spouse and tax dependents, regardless of the medical insurance in which they are enrolled. To use funds for your dependents, they must be claimed on your tax return, and dependents cannot file their own return.
Advantages And Disadvantages Of Flexible Spending Accounts
The funds from an FSA can be used to reimburse payments for medical care, which is defined to include amounts paid for the diagnoses, cure, mitigation, treatment, or prevention of disease or ailments affecting any structure of the body. However, expenses for surgery for cosmetic purposes and for items or services that are just beneficial for general health, such as gym memberships, are not reimbursable. Qualified medical expenses for FSA owners, their spouses, and dependents are covered.
Medical equipment purchases, such as diagnostic devices, bandages, and crutches, are covered by FSAs. Expenditures for prescription medications, including over-the-counter drugs for which you had a prescription, as well as insulin can be reimbursed with FSA funds. The Coronavirus Aid, Relief, and Economic Security Act enacted in 2020 expanded reimbursable qualified medical expenses for 2020 and later years to include the cost of over-the-counter drugs without a doctors prescription. The act also permitted the use of FSA funds to reimburse the costs of menstrual care products. Both of these CARES provisions are permanent.
Funds in an FSA may also be used to reimburse amounts paid in accordance with insurance plan deductibles and co-payments for medical services. Unfortunately, the money may not be used to pay for insurance premiums.
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Flexible Spending Rules In Retirement: Bottom Line
The FIRE movement is all about freedom and independence. It seems only fitting that FIRE retirees should have more freedom and flexibility in retirement spending as well.
Michael Kitces makes a compelling case for why early retirees may want to ditch the traditional usage of the 4% rule and choose flexible spending rules in retirement instead. You can check out his full article here.
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What Is A Flexible Spending Account
A flexible spending account is a type of savings account that provides the account holder with specific tax advantages. An FSA is sometimes called a flexible spending arrangement and can be established by an employer for employees. The account allows you to contribute a portion of your regular earnings employers also can contribute to employees accounts. Distributions from the account must be used to reimburse the employee for qualified expenses related to medical and dental services.
Another type of FSA is a dependent-care flexible spending account, which is used to pay for childcare expenses for children age 12 and under and can also be used to pay for the care of qualifying adults, including a spouse, who cannot care for themselves and meet specific Internal Revenue Service guidelines. A dependent-care FSA has different maximum contribution rules than a medical-related flexible spending account.
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Flexible Spending Account : Uses Benefits And Amounts
Michelle P. Scott is a New York attorney with extensive experience in tax, corporate, financial, and nonprofit law, and public policy. As General Counsel, private practitioner, and Congressional counsel, she has advised financial institutions, businesses, charities, individuals, and public officials, and written and lectured extensively.
Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018. Thomas’ experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning.
Many Members Would Have Few Or Even No Eligible Fsa Expenses Under Current Law
- Because of the way in which DoD provides child care benefits, a potentially large share of military families may not have eligible dependent care expenses. Specifically, expenses for off-base child care subsidized by DoD are unlikely to be FSA eligible.
- In the case of health care, most members would have few or no eligible out-of-pocket medical care costs associated with TRICARE.
- However, HCFSAs also cover health-related expenses outside of TRICARE, including over-the-counter medication, eyeglasses and contact lenses, and orthodontia expenses.
- Enabling legislation would need to be passed to allow for payment of insurance premiums from FSAs by military personnel.
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Cut Your Tax Bill With A Flexible Spending Account
Were all looking to reduce our income tax bill.
Not sure anyones looking to leave Uncle Sam a tip, after all.
One of the more interesting and useful ways to take a benefit right off the top of your earned income is to use a tax-free health or flexible spending or savings account.
The dollars contributed to these accounts, when used on a wide variety of medical expenses, are never taxed.
There are a bunch of different flavors of these tax-advantaged health care accounts, and depending on your employer, you might have access to one or more kinds.
Lets dive into FSAs with this guest post from T.R. Smith of Paychecks and Profits.
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The above article is intended to provide generalized financial information designed to educate a broad segment of the public it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.
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How An Fsa Lowers Your Taxes
Just like a 401 retirement plan, an FSA account is funded through deductions taken directly out of your paycheck. When you have an FSA, you are setting aside part of your salary so that you will be reimbursed for eligible medical or dependent care expenses during the year instead of paying out-of-pocket. You cannot claim a tax deduction for your contributions because the money was not taxed in the first place.
You decide once a year, during your benefits enrollment period, what percentage or amount of your salary you would like to defer into the FSA, up to a maximum. The money deferred is considered being paid with pretax dollars. So it reduces your gross income, which lowers the tax bill you will pay.
For example, if your annual salary is $40,000 and you decide to contribute $2,000 to your FSA, your gross income would then be $38,000. Any federal, state, or local taxes you pay would be based on that amount.
An FSA account holder cannot use it to fund purchases of common household items like toothpaste or shaving cream.
Dependent Care Reimbursement Account
Expenses incurred for dependent care services that allow you and your spouse to work are eligible for reimbursement under the Dependent Care Reimbursement Account. Eligible expenses for your child , disabled spouse, or other disabled dependent include the cost of daycare centers, private babysitters, and nursery schools.
The Dependent Care Reimbursement Account differs from the Medical Care Reimbursement Account in that, in the Dependent Care Reimbursement Account, you must have funds deposited before you can be reimbursed for expenses. The maximum limit is $5,000 per household.
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