Advantages of a Flexible Spending Account
An FSA can save you a significant amount of money. You will generally not pay federal income, state income, or FICA taxes on the salary you contribute to your FSA. As employers work to reduce steadily rising benefit costs through cost-sharing arrangements, a FSA will help.
How Does an FSA Operate?
Flexible spending accounts reimburse you for qualified expenses that you or your dependents incur during the plan year. At the beginning of each plan year you will make what is referred to as a "benefit election". This election states how much pre-tax salary you agree to contribute over the plan year. Once this election has been made, it cannot be changed during the plan year except under special circumstances.
The Medical FSA account allows for Advanced Reimbursement. This means that reimbursement is made based on your available credit, not based on the actual account balance. Your available credit is calculated by taking your annual election amount and subtracting any claims paid. This means that if you incur a large expense at the beginning of the plan year, you can actually get reimbursed from your FSA account for the expense without having contributed the funds. Your employer will then just continue to withhold your per pay period amount throughout the remainder of the plan year.
FSAs have a "use-it-or-lose-it" rule which means that money left in the account at the end of the plan year is forfeited back to your employer. However, employers have options that they can choose to provide in order to prevent these forfeitures. One option which has been around for a few years is the 2 ½ month extension. This allows participants to incur expenses up to 2 ½ months after the end of the plan year. The other option which was new at the end of 2013 is the $500.00 rollover option. This allows participants to rollover up to $500.00 of left over funds to the new plan year. Both of these options can be offered at the employer’s discretion.
If you are terminated before the end of the plan year, reimbursement requests for health care expenses incurred prior to termination must be submitted within the grace period established by the employer. Any funds remaining in the account after the grace period are forfeited back to the employer. If you have a positive health care FSA balance, you may be offered COBRA continuation coverage.