This is a form of savings account in which the owner gets some type of tax advantage. The employer can establish a flexible spending account or flexible spending arrangement for its workers. With the account, some portion of the earnings will be contributed to the account. Revenues from such accounts will be directed to reimbursing the worker for eligible expenses that have to do with dental and medical services.
One of the forms of FSA is the dependent care FSA specified to take care of a Child's expense (age 12 and below). One can also use it to care for qualifying adults like a partner that needs special care according to the IRS's specified guidelines. The contribution rule for dependent care is different compared to a medical-related one.
Operating Principle of a Flexible Spending Account
A flexible spending account stands out in that the funds are directed to the savings before tax which reduces your taxable income. This means that if you want to bring down your annual tax liability, this is a good way.
However, there is a limit on what one can contribute to an FSA every year. As a result, each employee's annual contribution cap for the medical expense type is placed at $2,750 for 2021 and 2020. Married people can also have their spouse contribute the same amount through their employer even though it is not compulsory. The contribution of your spouse does not affect or limit what you can contribute.
For dependent care FSA, the contribution cap is $5,000 for individual and joint tax returns. This amount is half for married couples with separate filing.
There are new guidelines from Uncle Sam that give more flexibility to the employer to get more benefits, especially during the Coronavirus, like special provisions for health FSA. In any case that the employer chose to allow this, the workers might disagree with an old election, go with a new one, or reduce or decrease an old election. Also, an employer can choose to allow workers to use any amount left in their health FSA when the grace period ends.
The HR or benefits person in the company can shed light on this for people that are confused about the options to take.
Flexible Spending Accounts: Pros and Cons
One can use the money from an FSA for many things, like reimbursing medical care payments. With this, you can use it to make payment for treatment, cure, prevention, and mitigation of disease, diagnosis, etc.
One, however, will not be reimbursed for surgery expenses to take care of cosmetics or care of general health like multivitamins. The plan also covers the dependents and spouse, alongside the owner.
FSA also covers the purchase of medical expenses like diagnostic items, crutches, bandages, etc. Also, prescription medication expenses, including drugs you got over the counter (with a prescription) and insulin, are covered.
The 2020 CARES Act (Coronavirus Aid, Relief and Economic Security) broadened the medical expenses that qualified, and that can be reimbursed for 2020 and upcoming years such that one can be reimbursed for drugs gotten over the counter without any doctor's prescription. With the care as well, expenses on a menstrual product can be refunded. These provisions by the CARES Act are permanent.
It is also possible to use FSA funds to reimburse expenses and amounts paid for deductible insurance plans alongside other payments for medical services.
Important things to Note
All funds specified in an FSA have an expiry period of the plan year-end. However, there can be a grace period of up to 75 days to exhaust the funds.
If someone did not take the option, there are plans that allow a rollover of up to $550 per year of unused funds from the account.
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