Here’s how much you could save on this employee if your business had a POP.

 

WHAT IS A FLEXIBLE SPENDING ACCOUNT?

Section 125 of the Internal Revenue Code allows you to defer a portion of your gross income into a tax free spending account (Flexible Spending Account or FSA) which may be used to pay for medical, dental, and vision related expenses for you and your eligible dependents.  Throughout the year, when an eligible expense is incurred, you may submit these claims for these expenses and they are reimbursed with the pre-tax money in the FSA.  The expenses you claim must not be eligible for reimbursement elsewhere and you will not be able to claim the reimbursed expenses as a medical deduction on your tax return. 

You may also establish a separate dependent care expense account, which may be used to reimburse eligible daycare expenses.  You will not pay federal, state, Medicare, or social security taxes on the portion of your gross income you elect to deposit to you medical and/or dependent care spending account(s).  If you determine that participating in an FSA plan is beneficial for you, you may enroll in one or both of these accounts.

HOW DO I SAVE TAXES USING A FLEXIBLE SPENDING ACCOUNT?

                Premium contributions are automatically deducted from employee salaries before taxes are taken out.  Because their taxable income is reduced by the amount they contribute, employees pay less tax on the money they earn.  Here is an example of how you will increase your spendable income by deferring gross income to one or both of the spending accounts:

HOW DO I KNOW HOW MUCH TO CONTRIBUTE TO THE PLAN?

                You choose the annual amount of pre-tax contribution from your income up to the allowable maximums based on your estimated PREDICTABLE expenses.  Be careful not to overestimate your anticipated expenses since funds not used by plan the end of the plan year will be forfeited.  When estimating expenses, remember to include expenses for both you and your dependents.  If you know you will have specific qualified dependent care and/or medical expenses during the next calendar year, you will probably benefit from enrolling in one or both of these plans.  Please use the attached worksheet to estimate your medical expenses.  If you do not have any anticipated expenses, this plan is not for you.

Following is a sample medical expense estimate worksheet for John Doe:

Based on the chart, John’s annual out-of-pocket medical expenses are estimated at $936.  John also has a toddler in childcare that costs him $2340 annually.  In addition to his medical FSA, he may also want to participate in a flexible spending account for dependent care and take advantage of yet more tax savings.  John can reasonably set up $2340 as an annual election for his dependent care FSA. 

HOW MUCH MONEY IS TAKEN OUT OF EACH PAYCHECK?

                The amount withheld from your paycheck is determined by dividing your annual election amount for each account by the number of payroll periods during the plan year.  For example, John Doe’s annual elections for his medical and dependent care FSAs are $936 and $2340 respectively.  He has 26 pay periods per year.  A medical annual election of $936 divided by 26 pay periods is $36 per pay period.  Likewise, his dependent care annual election of $2340 divided by 26 pay periods is $90 per pay period.  He will be making a total contribution of $126 into his FSAs per pay period.  This contributed amount is subtracted from John’s gross pay before taxes are calculated.

HOW DOES THE MEDICAL SPENDING ACCOUNT WORK?

                Medical reimbursement accounts are established to reimburse employees for out-of-pocket expenses not covered under the group medical plan such as annual deductibles, co-payments, eye exams, eye glasses, orthodontic services, prescriptions, etc.  Elections are payroll deducted on a pre-tax basis and placed in your Medical Flexible Spending Account.  As out-of-pocket medical expenses are incurred, you may submit the expense and be reimbursed from the pre-tax money in your account.

                Claims for medical expenses incurred during the plan year are eligible for reimbursement up to the annual election amount regardless of what has been contributed.  For example, if your annual election amount is $1,200 and you incur an expense of $600 during the first month of the plan year, you will be reimbursed the $600 regardless of your plan contributions to date (the plan advances payment and future pay withholdings pay back the plan).

HOW DOES THE DEPENDENT CARE SPENDING ACCOUNT WORK?

                Dependent Care accounts are established to reimburse employees for out-of-pocket expenses relating to dependent care.  THE DEPENDENT CARE EXPENSES MUST BE INCURRED SO THAT BOTH PARENTS CAN WORK.  Elections are payroll deducted on a Pre-Tax basis and placed in the employee’s Dependent Care Flexible Spending Account.  As dependent care expenses are incurred, you may submit the expense and be reimbursed from the accumulated pre-tax money in your account.  Claims for dependent care expenses will only be reimbursed up the amount available in your account.  Unlike the medical spending accounts, the plan will not advance you reimbursement for dependent care expenses.

WHAT DEPENDENT CARE EXPENSES ARE ELIGIBLE FOR REIMBURSEMENT?

                Following are some common examples:

·       Care at licensed nursery schools, day camps, and day care center for dependent adults or children

·       Services from individuals who provide care in or outside of your home (cannot be dependents of you or your spouse or your children under age 23)

·       Dependent care centers that provide day care for dependent adults (not residential care)