FSA – Flexible Spending Account sometimes called a cafeteria plan or a section 125 plan is a plan that is provided to employees by their employer and governed by the (IRS) Internal Revenue Service.  Flexible Spending Accounts allow employees to set aside money on a pre-tax basis for future out of pocket medical and daycare expenses of their family, which includes spouses and dependents. 

Yearly Contributions

  • Medical - The maximum yearly contribution is $2650 but lesser amounts can be contributed. Spouses can each contribute $2650 to their own plan.
  • Dependent Care- The maximum yearly contribution is $5,000 per household (combined) and the contribution cannot be more than the lesser earning spouse makes in a year unless the lesser earning spouse is a full time student. Dependent Care services include daycare, nanny, Au Pair and baby-sitting services provided the baby-sitter is declaring the income.

Carryover - As of October 31, 2013 employers are now allowed to add a provision that allows employees to carryover up to $500 of unused funds into the next plan year. The carryover can only be offered for health FSA plans (daycare is excluded) that do not offer a grace period.

Grace Period - A grace period is typically 2 and a half months following the plan year, which allows employees to spend unused funds that remain in their FSA account. The employer can offer a carryover or a grace period to their employees.

Run-out Period - A run-out period is a predetermined length of time (typically 90 days) that employees can submit claims for expenses that were incurred in the plan year.

Tax savings

  • Employees - FSAs allow employees to spend payroll taxes that would have otherwise been paid to the government and lost. An average worker pays 37.65% of their salary in taxes. These taxes include the following: Federal income withholding 15-35%, State income withholding 0-7%, and FICA (social security and Medicare) 7.65%.
  • Employers - Employers also benefit from their employees participating in health and dependent care FSA plans. Employers save FICA (7.65%) for every dollar that their employees contribute to the plans. Example: An employer with 10 employees that contribute to an FSA with an average of $1000.00 will saving $765 in FICA tax each year! 

 Sample FSA Employee Savings:

Typical Expenses allowed to be purchased as needed:

  • Co-pays
  • Co-insurance
  • Deductibles
  • Prescriptions (Rx)
  • Durable Medical Equipment
  • Band-Aids
  • Mileage and Travel expenses to and from a medical appointment
  • Over the Counter with a prescription