A flexible spending account (FSA) is a benefit offered to an employee by an employer which allows a fixed amount of pre-tax wages to be set aside for qualified expenses. Qualified expenses may include child care or uncovered medical expenses. The amount set aside must be determined in advance and employees lose any unused dollars in the account at year-end.
Flexible spending accounts benefit both employers and employees. Because FSA contributions are deducted from employees' pay before payroll taxes, employers save FICA taxes, as well as FUTA and most state payroll taxes on the amounts contributed. Employees pay FICA and income taxes on their pay after FSA contributions have been deducted. They save their share of the FICA tax on the amounts they contributed to an FSA, and because expense reimbursements from an FSA are entirely income tax free, they save income tax as well.
Before the beginning of the FSA plan year, the employee authorizes the employer to deduct a specified amount from his pay each pay period and credit it to his account in the FSA. As the employee incurs expenses, which qualify for reimbursement, he is reimbursed by the plan. Some over-the-counter drugs have recently been added to the list of expenses that qualify for reimbursement. Employees must provide documentation of all qualified expenses. Reimbursements cannot be made in advance for future or projected expenses. The maximum reimbursement available to an employee must be based on the total he has agreed to contribute during the year, not the amount he has actually paid in at any given time. So, the employer may in some cases be required to pay out more in benefits to a terminated employee than has bee contributed. Health FSAs reimburse participants for eligible uninsured medical and dental expenses. Dependent care FSAs provide reimbursement of as much as $5,000 per year for dependent care and related expenses.
Madison Pension Services can work with you to design and record keep your flexible benefit plan, including enrolling participants with plan-specific communication materials. Madison will prepare and file your plan document and summary plan description.