Flexible Spending Accounts (Section 125)

Flexible Spending Accounts (FSA) are employer-sponsored plans that lets employees deduct dollars from their paycheck and put them into a special account that's protected from taxes. FSA accounts are exempt from Social Security (FICA) and federal and state income taxes. The more money they can put in, the more tax they avoid. When they use the money in their account to pay for out-of-pocket family health care expenses, dental expenses, day care, public transportation, etc. they avoid paying taxes on those dollars. Depending on their tax bracket, they could save up to 30% on these types of out-of-pocket expenses.

Adding a FSA to your benefits package is an excellent way for employers to attract and retain valuable employees. The employer also saves Social Security Tax making it a win/win situation. Note that with the advent of HSA's, many insurance agents simply don't explore FSA's with their clients nor do they follow through with appropriate FSA documentation putting employer's at risk in the event of an IRS audit. Harmony Insurance Benefits specializes in articulating the benefits of FSA's and coordinating all the necessary paperwork. As your agent, you get our expertise and our help.

How Does FSA Work?

When your employee enrolls in the FSA plan, they must estimate the amount of out-of-pocket family expenses they are sure they will experience during the year, up to a pre-determined maximum amount. They have that amount deducted from their paychecks in equal amounts throughout the year. Though their actual salary remains the same, their taxable salary as reported to the government is reduced by the amount they put into their FSA.

The FSA is designed to reimburse qualified expenses for your employee and their IRS/eligible dependents, regardless of whether they are covered by any other benefit plan sponsored by their employer. Expenses related to medical, dental or vision services that are not covered by their insurance plan are eligible. Typical expenses include deductibles and co-pays, eye exams, glasses, contacts and cleaning solutions and orthodontic services, dependant (child) care, public transportation and other qualified expenses.

Only costs of purchases made or services provided during the plan year and while they are a participant are eligible for reimbursement. Recent IRS rules extend the deadline to submit claims up to March 31 following the participating plan year, but claims still need to be incurred within the participating calendar year. After that date, if they fail to submit claims, those monies still unclaimed in their account will be forfeited per IRS rules.

Harmony Insurance Benefits will provide your employee with a worksheet to help them figure out the right amount to put into their account. Also per IRS regulations, once they enroll in the plan they may not change their payroll elections unless they experience a "Change in Status" such as change in legal marital status, number of dependents, employment status or dependent eligibility.

How Does The Dependent Care FSA Work?

The Dependent (Child) Care Spending Account provides your employee with the opportunity to use tax-free dollars to pay for the care of their children under age 13 or other IRS/eligible dependents while they and their spouse work or go to school full time. The IRS rules designate eligible expenses for the Dependent Care Spending Account.

Childcare services may include their cost to send a child to preschool, after school, or nursery school. Also, expenses for dependents of any age that are unable to care for themselves because of a physical or mental handicap are eligible. A person qualifying for this type of care must spend at least eight hours a day in their home. Elderly dependent care may include their cost to send a dependent parent to an elderly daycare facility or to have someone to care for them in their home. If they are married, both they and their spouse must be working or a full-time student during the time the care is received. Their income tax return (long and short forms) will require them to include their dependent care provider's name and tax number or Social Security number.