The Preferred Group has been offering the tools for an employers benefit package for over 20 years. A good benefits package can be one of the best ways to attract and keep good employees. By offering Flexible Spending Plans you will experience a reduction in FICA taxes of 7.65% on all contributions to the plan, while employees who participate reduce their taxable income. The result is lowered taxes for you, with added benefits to your employees.
Flexible Spending Accounts (FSA)
Flexible Spending Accounts (FSAs) also referred as “Cafeteria” or “Section 125 Plans”, were designed by the IRS to provide a tax relief to employees on every day unreimbursed medical and dependent day-care expenses. FSAs allow employees to contribute pre-tax dollars to these accounts; these contributions are not subject to FICA, federal or state payroll taxes. This plan allows an employee to save as much as 30-40% on directed funds and allows an employer to save 7.65% FICA tax on all contributions made to the plan.
Unreimbursed Medical FSA
The most common type of FSA account is the Unreimbursed Medical Account; this is used to pay for eligible medical expenses not paid for by your insurance company. The most common expenses are usually deductibles, copayments, and coinsurance related to your health plan, but may also include expenses not covered by the health plan, such as dental and vision expenses and over-the-counter drugs including cough medicine and band aids. All items must be intended to treat or prevent a specific medical condition; this can be as significant as diabetes or pregnancy, or as trivial as skin cuts. Generally, allowable items are the same as those allowable for the medical tax deduction, as outlined in IRS publication 502.
The annual caps for a medical FSA varies by employer. Unlike dependent care FSAs, there is no IRS cap on medical FSAs, but employers generally limit the annual amount each employee may contribute, in order to reduce the risk of pre-funding. Should the employee leave or be terminated and thus no longer pay into the plan, the employer does not recapture their pre-funding from the employee's payroll deduction.
Dependent Day Care FSA
FSAs can also be established to pay for certain expenses to care for dependents that live with you while you are at work. While this most commonly means child care, for children under the age of 13, it can also be used for adult day care for senior citizen dependents that live with you, such as parents. It cannot be used for summer camps (other than "day camps") or for long term care for parents that live elsewhere (such as in a nursing home).
The dependent care FSA is federally capped at $5,000 per calendar year, per family or $2,500 if married and filing separate tax returns. While married spouses can elect to have this amount deducted from their paycheck and applied to expenses, at tax time all withdrawals in excess of $5,000 are taxed. Unmarried couples can each deduct and use $5,000. However, these expenses are subject to the "qualifying child" rule, which usually means unmarried couples cannot pay expenses for the same child.
Unlike the unreimbursed medical accounts, the dependent day care accounts cannot be "pre-funded"; employees can only receive reimbursement on eligible expenses as funds are deposited into the FSA. If married, BOTH spouses must earn income in order for the Dependent Care FSA to work. The only exception is if the non-earning spouse is disabled or a full time student. If one spouse earns less than $5,000 then the benefit is limited to whatever that spouse earned. Many plan administrators do not warn of this limit. This limitation can create a situation where the earning spouse sets up a Dependent Care FSA and sends in receipts to withdraw funds and then at tax time the FSA is effectively eliminated and all the work wasted. See IRS Form 2441 Part III for details.
Over-the-counter drugs and medical items
Another very powerful medical FSA feature that has been introduced in recent years is the ability to pay for over-the-counter (OTC) drugs and medical items. In addition to substantially expanding the range of "FSA-eligible" purchases, adding OTC items made it easier to "spend down" medical FSAs at year-end to avoid the dreaded "use it or lose it" rule.
…....see list of eligible expenses…….
Reimbursement Process
You are reimbursed for eligible expenses that occur within your Plan Year. In order to be reimbursed from any Flexible Spending Account, you submit a signed and completed reimbursement voucher with a copy of the third-party receipts to support your claim. Following the end of your Plan Year you have a 90-day Grace Period to submit vouchers for eligible expenses that occurred within the Plan Year.
Pre-paid Benefits Card
The Prepaid Benefits Card is a special-purpose Visa card that gives you an easy, automatic way to pay for eligible expenses. The debit card allows for the automatic electronic transfer of pre-tax dollars from an employee account when paying for qualified expenses. Employees are able to receive immediate reimbursement of their unreimbursed medical and dependent day care expenses simply by using their card at the point of service. The normal paper claims process is eliminated although receipts are still required to be saved and kept with your tax records and can be requested by the IRS during an audit or for substantiation on claims.
FSA’s coverage period
An FSA's coverage period ends either at the time the "plan year" ends for your plan or at the time when your coverage under that plan ends. Example: Loss of coverage due to a separation from the employer.
This means that if, for example, you are employed by a company from January through June and covered on their cafeteria benefits plan (including FSA) during that time, but do not elect and pay for continued coverage under that plan (i.e., COBRA). Your coverage period is defined only as January through June, not January through December as one might think. In this example, all covered expenses must be incurred between January and June of that year.
Use it or lose it
Employees participating in an FSA must spend their money within the coverage period, commonly defined as the plan year. Any money that is left unspent at the end of the coverage period is forfeited back to the employer; this is commonly known as the "use it or lose it" rule. The IRS allows employers to give employees an extended expense period of two and a half months immediately following the close of the plan year during which time the employee may incur expenses which may be eligible for reimbursement from the employee's flexible spending account(s). Participants are also encouraged to check and monitor their accounts thru The Preferred Group's online access and will receive quarterly statements expressing any balances in their account(s).It should be noted and called out for emphasis that under most plans your "coverage period" generally ceases upon termination of employment whether initiated by you or your employee unless they continue coverage with your benefits under COBRA or other arrangements.