FSA
Most cafeteria plans offer two different flexible spending accounts; one is for qualified medical expenses and the other is for dependent care expenses.
A few cafeteria plans offer other types of FSAs
Participation in one type of FSA does not affect participation in another type of FSA, but funds cannot be transferred from one FSA to another.
Medical expense FSA
The most common type of FSA is used to pay for medical expenses not paid for by insurance, usually deductibles, copayments, and coinsurance for the employee's health plan. Some employers choose to issue a debit card to their employees who participate in the FSA. Participants may use the debit card to pay for their FSA-eligible expenses at the point of sale. Pharmacies and grocery stores who choose to accept the debit card as payment must disallow transactions at point of sale if the participant attempts to pay for items that are not eligible under an FSA.
In addition, employers still must require employees to provide itemized receipts for all expenses charged to the debit card. The IRS allows employers to waive this requirement when an individual uses the debit card at a pharmacy or grocery store that complies with the above procedure. The IRS also allows employers to waive this requirement when the amount charged to the debit card is a multiple of a co-pay of the employee's group health insurance plan.
In most cases, the FSA administrating firm will prefer actual insurance Explanations of Benefits (EOBs) clearly representing the patient portion of any medical expense, over other, more vague documentation. This requirement is becoming less cumbersome as more insurances allow patients to search for past EOBs on their websites.
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.
Plan year grace period
In 2005, the Internal Revenue Service authorized an optional 2½ month grace period that employers can use in their plans, allowing use of the funds for 2½ months after the end of the plan year.
Pre-funding and risks incurred by the employee and employer
One consideration regarding medical FSAs is that the participating employee's entire annual contribution is available at the start of the plan year, commonly January 1, or after the first contribution to the FSA is received by the FSA vendor, depending on the plan. Therefore, if the employee experiences a qualifying event during the first period, the entire amount of the annual contribution can be claimed against the FSA benefits. If the employee is terminated, quits, or is unable to return to work, he does not have to repay the money to the employer
The employee contributes to the FSA in small increments throughout the year (for example, 1/26 of the annual amount if you are paid biweekly), but taken together, all employees of a company contribute the full average amount during any given period, and no real risk is incurred by the employer. In addition, instead of paying payroll taxes to the government, the employer typically pays only a small administrative fee to the plan of $4–10 per participating employee. This is much less than the employer would have paid for its share of payroll taxes. In addition, any money that is not used by the end of the plan year (or grace period) is returned to the employer. This is estimated to be up to 14% of the total employee contributions, which can be a substantial boon to the employer's bottom line.
If a company plans to lay off some employees, and announces such plans, then if multiple employees use their entire flexible benefit before they are terminated, that may cause the company to have to reimburse the plan. Typically, however, employers do not announce layoffs for specific employees with enough notice for employees to use the available benefits, and employees may actually lose their contributions in addition to being laid off.
An employee does not continue to contribute to the plan upon termination of employment. Thus, one could use the entire amount on day one of the plan year, terminate employment on day two of the plan year, and contributions would have been none or negligible (e.g., perhaps 1/26 in the case of biweekly contributions). The "free" money is not taxable. The reason for this is that the IRS views these plans as health insurance plans for tax purposes. According to IRS section 125, benefits received from a health insurance plan are not considered taxable income.
The same reasons that make pre-funding a possible benefit to an employee participating in a plan make them a potential risk to employers setting up a plan. The employer has to make up the difference that the employee has spent from the flexible spending account but not yet contributed if other employees' contributions do not account for the money spent. The amount the employer loses due to pre-funding may eventually be partially, totally, or more than made up by employees that do not spend all of the money in their FSA account by the end of the plan year and grace period.
Here's a benefit plan you can join which actually saves you money.
A Medical Flexible Benefits Plan reduces your taxes because you pay for unreimbursed health care expenses with pre-tax dollars.
Each year you decide how much to contribute to each account based on your needs. Don't pass up the opportunity to save on taxes.
How much will you pay for "out-of-pocket" health care expenses this year?
For items like health plan deductibles, co-payments, prescriptions, dental, orthodontic care, and vision care (including glasses, contacts, and even corrective surgery)?
Whether it's hundreds or thousands, you can save money by paying for these expenses with tax-free money, if you sign up to participate in the Health Care FSA.
For a Brochure Click Here
For a list of FSA eligible items and expenses Click Here