 Personal Finance PowerPoint Presentation Flexible Spending Account FSA Prepare to get financially fit by practicing personal finance Insurance is part of our long-term risk mitigation strategy where we follow the adage of measure twice, cut once, put in a formal process in place, looking something like set in the goals, develop a plan to reach them, put the plan in action, review the results, repeat the process periodically. Most of this information can be found at Investopedia, Flexible Spending Account FSA, which you can find online. Take a look at the references, resources, continue your research from there. This is by Michael P. Scott, updated January 13, 2022. In prior presentations, we've been taking a look at insurance. We then moved to the medical insurance, and now we're thinking about the FSA in alignment with those discussions. What is a flexible spending account, an FSA, you might ask? A flexible spending account, an FSA is a type of savings account that provides the account holder with specific tax advantages. An FSA is sometimes called a quote flexible spending arrangement, end quote, and can be established by an employer for employees. The account allows you to contribute a portion of your regular earnings, employers can also contribute to employee's accounts, distributions from the account must be used to reimburse employee for qualified expenses related to medical and dental services. So you're putting money into the FSA. Why would you do this? So you're taking money, it would be most likely a withholding, for example, from your W-2 or from your wages or possibly provided by the employer that would then be going into the FSA. Why wouldn't the employer just give you cash? Why not just give you the money? And then you could spend the money on your own medical expenses because they're trying to have some kind of way to get a benefit that has a tax advantage. If you could get a tax advantage, it's beneficial to both the employer and the employee because the money that the employer is giving to the employee may be able to go further due to the ability to have the tax advantage. Why would the government want to do this? Well, now you're putting money into an account that's for a specific use. So they're trying to gear you or try to get you to do more preventative care, for example, by spending the money out of this account on certain things. So you're restricting the money. If you just got the money, of course, you could do whatever you want with it if it was outside of the FSA, but it might be subject to taxation. If it goes into the FSA, then you're going to have to spend it on stuff that qualifies for it in order to get to the tax benefit, which is going to be for some kind of medical expenses. So another type of FSA is a dependent care flexible spending account, which is used to pay for child care expenses for children age 12 and under and can also be used to pay for the care of qualifying adults, including a spouse who cannot care for themselves and meet specific internal revenue service IRS guidelines. A dependent care FSA has different maximum contributions rules than a medical related flexible spending account. So you want to make sure that you're inside of the rules for the FSA. It could be a little bit confusing to do this, but might be worthwhile if you can get some tax benefits, some tax savings from it. So a flexible spending account and FSA works how it works. One of the key benefits of a flexible spending account is that the funds contributed to the account are deducted from your earnings before taxes lowering your taxable income. So when we think about taxes, income taxes, everything's flipped on its head. Everything is in reverse. Another word meaning we usually think of income as good, but for taxes, income is bad because it's an income tax and the tax, the income, if we have more income that's taxable, they're going to tax us on it. So if we can have stuff that's given to us income that's given to us that's not taxable, then that would be good. And that's what the benefits kind of programs can come into play. So as a result, regular contributions to an FSA can reduce your annual tax liability. That's the point. The IRS limits how much you can contribute to an FSA account per year for medical expense FSA account. The annual contribution limit per employee is $2,750 for 2021 and 2,850 for 2022. If you are married, your spouse can also put aside up to the annual contribution limit through their employer. Employers can choose to contribute to an FSA, but they do not have to. If they do, their contribution does not reduce the amount that you are permitted to contribute. You are not taxed on employer contributions. So if you think about the money that's coming out of like your W2, your paycheck stub, you would think that if you're paying for it, then you'd have your gross income and then you'd be taking the money out like kind of like a withholding similar to Social Security, Medicare and federal income taxes, which would be going to the FSA or the employee or can count it like they're putting the money in over and above the salary. The salary so it wouldn't be part of the withholding. It would be the employer contribution. So for 2021, the contribution limit for a dependent care FSA is $10,500 for joint and individual tax returns and $5,250 for married taxpayers filing separately and increase given through the American Rescue Plan of 2021. For 2022, the contribution limit returns to $5,000 for joint and individual tax returns and $2,500 for married taxpayers filing separately. Advantages and disadvantages of flexible spending accounts FSAs. The funds from an FSA can be used to reimburse payments for medical care, which is defined to include amounts paid for diagnosis, cure, mitigation, treatment or prevention of disease or ailments affecting any structure of the body. However, expenses for surgery for cosmetic purposes and for items or services that are just beneficial to general health, such as a gym membership are not reimbursable. So obviously when you start thinking about these kind of benefit programs and you're saying, OK, I've got money in the FSA. Obviously I want to put the money in the FSA because I get a tax benefit from it, but now it's stuck in there. What can I spend that money on that's going to be a qualified type of thing? And you can get into, OK, it's got to be the medical kind of stuff. But then people get started to get creative and say, well, what if my medical, my doctor said I should go to the gym? How about it should be part of my gym membership and stuff like that? And you can see we're going to have to draw lines and get a little bit confusing when people are going to try to get creative. But qualified medical expenses for FSA owners, their spouse and dependents are covered. Medical equipment purchases, such as diagnostic devices, bandages and crutches and crutches are covered by FSA. Expendices for prescription medications, including over-the-counter OTC drugs for which you had a prescription as well as insulin can be reimbursed with FSA funds. The Coronavirus Aid Relief and Economic Securities CARES Act, enacted in 2020, expanded reimbursable qualified medical expenses for 2020 and later years to include the cost of over-the-counter drugs without a doctor's prescription. The Act also permitted the US, the use of FSA funds to reimburse the cost of menstrual care products. Both of these CARES provisions are permanent. Funds in a FSA may also be used to reimburse amounts paid in accordance with insurance plan deductibles and co-payments for medical services. Unfortunately, the money may not be used to pay for insurance premiums. So that would be the big one. You're probably thinking, what about the insurance premiums in here? So we got the special considerations. The money set aside in an FSA generally must be used by the end of the plan year. However, a plan can offer a grace period of up to two and a half months to finish using that funding. If that option is not taken, a plan may allow you to roll over up to five thousand five hundred and fifty five hundred and fifty dollars per year of unused funds from your account. Neither option is required, but only one may be offered by the plan. So it get a little bit confusing when you start to say, OK, how much can I put into this plan? What can I use the money for? What happens if I don't basically use the money in the plan? Obviously, all this is set up in an attempt to get some tax benefit from it. So when the year ends or the grace period expires, any funds that remain in your FSA are lost. Thus, you should carefully calibrate the amount of money you plan to put into your account and how you intend to spend it over the course of the year. So it's one of those things you really got to keep an eye on so that you're maximizing your benefits as you as you put the process in place. So the Internal Revenue Service has announced that because of the impact of COVID-19, it will permit but not require employers to amend health plans so that employees can change elections that usually are allowed only once a year. Also, the IRS will allow employer discretion to amend FSA plans for 2020 and 2021, either to allow employees to carry over more than the current $550 maximum or to extend the grace period for using unspent FSA funds through December 31st of each year, a different type of FSA, a quote, limited purpose flexible spending arrangement in quote, that's the LP FSA. A little bit different refers to a saving plan that can be used with a health savings account HSA, unlike a standard FSA. Employers may use an LP FSA to in conjunction with an HSA. Contributions are made using pre-tax earnings. A limited purpose FSA is more restrictive because the arrangement is reserved for paying dental and vision expenses and sometimes other costs incurred in a high deductible health plan. That's the HD HP after the plan holder meets the deductible. So we've talked about this in prior presentations when we talked about different kinds of health plans, noting that the high deductible plan is usually the kind of like the cheaper plan that might you might use if you're more healthy and or if your income is lower and so you want the lower premiums and then the law came in and said, well, if you have the high deductible, they want to incentivize you to do the preventative stuff. So that's when we have this HSA discussion coming to place, which we might take a look at a little bit more in the following presentations. So how much should I contribute to my FSA? No specific amount is correct for everyone. And FSA elections vary depending on the particular situation of an individual. Make your election by carefully examining your expected out-of-pocket health care expenses for the upcoming year. So if my spouse is enrolled in a different health insurance plan, what happens then? You can use funds from your health care FSA to pay for eligible medical costs for both your spouse and tax dependents, regardless of the medical insurance in which they are enrolled, because it's kind of like a different thing. It's not specifically tied to the insurance. It's kind of thinking that you're paying stuff that's going to be out of pocket kind of medical type of expenses. So to use funds for your dependents, they must be claimed on your tax return. So it is a tax related item. So clearly if you're saying that they're dependent, we're generally talking dependents for taxes would be someone that you would be expecting to see claimed on the tax return. And dependents cannot file their own return. If they file their own return, then you would think they might not be claimed on your return.