When employers include a flexible spending arrangement (FSA) in the list of benefits, employees should take advantage of it. By participating in an FSA, employees can allocate a portion of wages to pay for eligible products and qualified medical expenses. Money is put into the account on a pre-tax basis and withdrawals are tax-free if they are used to pay for qualified medical expenses. Employees can save valuable cash on healthcare supplies by using this account. Several guidelines should be followed when purchasing eligible products and maintaining an FSA.
Step 1: An FSA operates on an annual basis based on a coverage period called a plan year. This period is usually a calendar year but employees should refer to their plan documents to make sure. Any money remaining in the account at the end of each year will be lost if it is not used. However, the IRS allows employers to offer a 2 ½-month grace period following the end of the plan year within which funds may be used.
Step 2: By using a medical FSA, a taxpayer can save more money than by claiming the medical expenses as an income tax deduction. Only medical expenses exceeding 7.5 percent of adjusted gross income may be deducted on a tax return. With an FSA, all money spent on qualifying items is free of taxes. Medical expenses are exempt only from income taxes when an eligible amount is included on a tax return. With an FSA, these expenses are exempt from both FICA and income taxes.
Step 3: As of 2010, most products available over the counter cannot be paid for using the FSA. However, products that are used to treat, prevent, or diagnose a certain medical condition might be covered. Insulin, health insurance co-pays and deductibles, contact lenses, eyeglasses, and medical devices are not affected by this change. Herbal supplements, vitamins, and other nutritional supplements are only eligible if a licensed medical professional prescribes them to treat a certain medical condition. The prescriber must provide a written directive, such as a prescription, in order for these to be eligible for FSA reimbursement.
Step 4: Money contributed to an FSA can be accessed in several ways. About 85 percent of employers provide participants with debit cards to use for eligible purchases. Most participants still must provide an itemized receipt for each expense paid for with this card. Other participants submit their receipts and a claim form to the account administrator and are reimbursed via check or direct deposit or use credit or stored value cards.