Flexible Spending Accounts - FSA
Employer sponsored Flexible Spending Accounts (FSAs) allow employees to set aside a portion of their earnings on a pre-tax basis to pay for qualified medical and/or dependent care expenses.Health FSA
The most common type of FSA is used to pay for medical expenses not covered by insurance; this usually means deductibles, copayments, and coinsurance for the employee's health plan, but may also include other expenses not covered by the health plan such as dental and vision expenses and over-the-counter drugs or medical supplies.A Health FSA cannot pay for health insurance premiums, cosmetic items, cosmetic surgery, controlled substances, or items that improve "general health". 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 employee’s annual election for the Health FSA is available for the employee and his/her family or eligible dependents at any time within the plan year after the employee has enrolled and become an active participant in the Plan. This is known as the Uniform Coverage Rule.
Dependent 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 dependent children up to age 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 (Dependent Care Assistance Plan or DCAP) is federally capped at $5,000 per year. While either spouse can each elect to have this amount deducted from their paycheck and applied to expenses, at tax time all contributions in excess of $5,000 are taxed. Unmarried couples can each deduct and use $5,000 for their eligible dependents. Couples filing separately may each claim $2,500.
Unlike medical FSAs, dependent care FSAs have no Uniform Coverage provision; employees can only receive reimbursement as funds are deposited into the FSA. IRS requirements generally require employees to pay their child care expenses by other means, and be reimbursed via direct deposit or check from Dependent Care FSA funds each pay period, though employees can also use a Flex Debit Card to pay a child care provider if they accept debit or credit card payments.
If married, BOTH spouses must earn income in order to participate in a Dependent Care FSA. The only exception is if the non-earning spouse is disabled or a student. If one spouse earns less than $5,000 then the benefit is limited to whatever that spouse earned. Both spouses must be working at the time the care is provided in order for the expenses to be eligible.
