How do they work? A set amount is deducted tax free from each paycheck and deposited into a special account. The money can be used to pay qualified reimbursed medical, dental, and vision expenses.
Examples of qualified expenses – co pays, deductibles, prescription medicines, dental visits, eye glasses or medical equipment – paid for yourself, your spouse, dependents, and children who are under age 27 at the end of the tax year.
Why contribute to a FSA? It reduces the amount of federal income tax and payroll taxes (Social Security & Medicare taxes) you pay.
Example: Elvis contributes $50 per biweekly paycheck for a total of $1,300. If he is in the 25% tax bracket he could reduce his tax liability by $424. That is a nice sum to buy something nice or save for a rainy day.
Things to know:
- For 2017, an employee can contribute up to $2,600.
- Funds not spent by year end: Use it, lose it, or potential (but not guaranteed) carry-over. Some plans offer a grace period or carryover (limit of $500) for funds left in the account. Check your specific plan for details.
- You can withdraw funds to pay qualified medical expenses up to your yearly total before you contribute the full amount.
- Access to funds: Some plans provide convenient debit cards. Fund total is loaded at the beginning of plan year.
- You can change or revoke your election only if there is a change in your employment or family status that is specified by the plan.
- Health care insurance premiums & long-term care coverage are not considered qualified medical expenses.
For more information visit the IRS web site https://www.irs.gov/publications/p969/ar02.html