Health Flexible Spending Accounts and Dependent Care Flexible Spending Accounts allow employees to use pre-tax dollars to pay dependent care expenses and medical bills not covered by their insurance. Each FSA is covered by a separate Plan Document. Either of these plans can be offered in conjunction with a POP. The FSA is a budgeting tool that can help take care of out-of-pocket expenses such as day care, dental and optical care deductibles, co-pays, and prescription drugs. Like a POP, an FSA helps pay for itself by increasing employee take-home pay while decreasing employer payroll taxes.
An employee decides how much of their salary should be set aside before taxes are calculated. This amount is automatically deducted from their paycheck every pay period, just like any other payroll deduction, and is deposited into their FSA account. The employees would pay their out-of-pocket expenses up-front, then submit a claim and documentation and a reimbursement is made from their own Health FSA or Dependent Care Assistance Plan account.
Health FSA Out-of-pocket expenses include:
Eyeglasses and contact lenses
Medical insurance deductibles
Prescriptions
Co-payments
Orthodontia
Chiropractic services
Dental treatments
X-ray and laboratory services
A Dependent Care FSA allows an employee to be reimbursed on a pre-tax basis for childcare or adult dependent care expenses for qualified dependents that are necessary to allow the employee or their spouse to work, look for work, or attend school full-time.
A Dependent Care FSA can be used to reimburse employees with pre-tax dollars if the expenses for dependents meet the IRS definition of dependent for income tax purposes. An adult (e.g., parent, grandparent, adult disabled child) may qualify as a dependent if the employee is providing more than half of that person's maintenance for the year.
Dependent care FSA's limit the annual maximum allotment by law to $5,000 per year, $2,500, if married filing a separate return. If an employee is currently receiving a childcare subsidy, they must ensure that the total amount they elect through the FSA combined with the total amount of the childcare subsidy they receive does not exceed the $5,000 limit. If married, the $5,000 limit must be observed by the employee and their spouse where both individuals have access to an FSA and/or a childcare subsidy.
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