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A flexible spending account (FSA), offered as an elective benefit by many employers, permits workers to contribute, through payroll deduction, to accounts that are designated for specific qualified medical or dental expenses not covered under your health insurance plan. All amounts contributed are pretax and funds are not taxed when spent on qualified health care costs.
Eligibility
FSAs are employer-based; self-employed individuals are not eligible. To participate, you usually must enroll through your employer each year, even if you do not want your deduction amounts to change from year to year. Employers generally offer enrollment during open enrollment periods when you enroll for the entire plan year. If you want to change or revoke your election before the end of the plan year, you typically can do so only if your plan permits a change due to circumstances in your employment or family status.
Contributions
Before contributing to an FSA, you must first designate how much you want to contribute for the year, based on an estimate of your expected out-of-pocket costs. Your employer will then deduct amounts from your paycheck in accordance with your annual election. Although there is no IRS limit on the amount of money you or your employer can contribute to the accounts, each plan prescribes either a maximum dollar amount or a maximum percentage of your salary that can be contributed.
You do not pay federal income tax or employment taxes on the salary you contribute or on any amounts your employer may contribute to the FSA. However, amounts contributed that are not spent by the end of the plan year are forfeited. For this reason, it is important not to overestimate the qualifying expenses you expect to incur during the year.
Eligible Expenses
Eligible expenses include most of the out-of-pocket costs not fully covered by your health plan, including copayments, deductibles, vision care, prescriptions, over-the-counter medicines, dental care, tests, and medical supplies, among others. See IRS Publication 502 at www.irs.gov for a more detailed list of qualifying expenses.
Filing Claims
In order to use funds set aside in your FSA, you must either submit claims for reimbursement or use the debit card, credit card, or stored value card provided by the vendor overseeing the FSA. For more information on reimbursement procedures or how to file claims, talk to your employee benefits administrator.
Not for Everybody
Whether an FSA will suit your needs depends largely on the out-of-pocket costs you expect to incur and how accurately you can predict them. If you expect to incur no more than a few hundred dollars over the course of the year, it may not be worth the trouble of setting up an FSA. On the other hand, for those with predictable medical costs or ongoing treatments that are not covered by an employer-sponsored medical plan, an FSA can be a good way to set aside funds while lowering your tax bill. Ultimately, the decision boils down to your particular circumstances and needs.
© 2010 Standard & Poor's Financial Communications. All rights reserved.
© 2010, Kelly Ruggles, Spokane, WA. Web site
Kelly C. Ruggles, Spokane, WA. is a fee-based financial planner located in Spokane.
Kelly C. Ruggles, Spokane, WA. President of American Reliance Group, Inc., a registered investment advisor.
Kelly Ruggles, Spokane, WA. is the author of "The Financial Playbook" for Retirement
Kelly C. Ruggles, Spokane, WA. Does not intend to provide personalized investment advice through this publication and does not represent the strategies or services discussed are suitable for any investor. Investors should consult with their financial advisors prior to making any investment decisions.
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