Tuesday, November 15, 2011


Many employers offer their employees the opportunity to participate in a “Flexible Spending Account” (FSA).  If your employer offers an FSA you should consider enrolling – you can realize substantial tax savings from such a plan.

For many employers fall is “open enrollment” for FSAs.

Participants in an employer-sponsored dependent care or health care FSA can set aside a specific dollar amount from their salary each year to pay for qualified child-care or medical expenses during the year. The maximum amount you can set aside for a dependent care plan is $5,000. There is no statutory maximum for a medical expense FSA, but most employers will impose a limit.

Monies set aside in a Flexible Spending Account are considered “pre-tax” for both federal income tax and FICA (Social Security and Medicare) tax purposes. If your annual salary is $50,000 and you set aside, and spend, $5,000 in an FSA, the federal wages reported in Box 1 on your Form W-2, as well as the Social Security and Medicare wages, will be $45,000. If you are in the 25% bracket, this $5,000 will save you $1,533 in federal income and FICA taxes.

A pre-tax contribution to a dependent care FSA will generally provide a greater tax benefit than claiming the Child and Dependent Care Credit – especially for those in the 25% and higher brackets. The maximum credit allowed is $600 for one qualifying child or $1,200 for more than one qualifying child.

Medical expenses are deductible as an Itemized Deduction on Schedule A only to the extent that they exceed 7 1/2% of your AGI. Medical expenses paid through a pre-tax health care FSA are fully deductible from gross income.

The savings does not end there. Employee contributions to an FSA will reduce Adjusted Gross Income and could increase a multitude of deductions and credits affected by AGI.   Plus many states also treat FSA contributions as “pre-tax”, so you may save state income tax as well. 

An FSA is a “use it or lose it” plan. If the amount of qualifying child-care or medical expenses paid by an employee-participant during the year is less than the amount that has been set aside in the plan the employee loses the excess.

if Mary Mom has set aside $5,000 of her salary in her employer’s dependent care FSA for 2011, but pays only $4,000 in qualifying child care expenses during the year, she loses $1,000 in wages! The $1,000 cannot be carried forward to the next plan year. So if you are a participant in a dependent care FSA and you currently have an unspent balance in your “account” make sure you spend that balance before year-end so you do not have to forfeit any of your salary.

There is an exception for a medical expense FSA. If the plan allows, participating employees have until March 15th of the next to submit expenses to the plan. If the above example was for a medical FSA Mary would have until March 15, 2012 to submit up to $1,000.00 of medical expenses to apply against the $5,000 set aside for 2011.


1 comment:

Bruce said...

Had a client check in yesterday asking about this.

Glad you wrote about it. I am sure you explained it better than I did when she called yesterday.

I forwarded the post link on to her, in an effort to better explain to her about FSA.