In 2018, under new flexible spending account rules, employees may give an extra $50 to their employer’s health care Flexible Spending Accounts (FSAs), as the Internal Revenue Service (IRS) raised the contribution limit from $2,600 in 2017 to $2,650 in 2018. Although it is only $50, it gives small businesses, and their employees, a chance to revisit FSAs, their contribution limits and their potential benefits.
What Is a Health Care FSA?
According to the IRS, “FSAs provide employees a way to use tax-free dollars to pay medical expenses not covered by other health plans.” Employees will need to make the decision on how much to contribute through payroll deductions to their FSA at the beginning of the plan year, according to the IRS.
An employee may contribute the maximum of $2,650 to their FSA in 2018. According to the Motley Fool, by contributing to an FSA, your take-home pay may not decrease by much “because your tax withholding will adjust to reflect the fact that the money saved in the FSA isn’t subject to tax.” Further, employees will save on both Social Security and Medicare taxes, as those are not withheld from contributions either. Creating potential tax savings for employees is a big bonus and one that needs attention.
Employees may use their FSA funds to cover certain qualified medical expenses that their employer’s plan does not cover, such as co-pays and deductibles. Other qualified medical expenses include contact lenses, eye exams, eyeglasses, crutches and hearing aids, according to the IRS’s Publication 502. However, employees may not pay for certain over-the-counter drugs with their FSA without a doctor’s prescription.
According to WageWorks, employees can save an average of 30 percent on these qualified medical expenses through the pre-tax FSA vehicle. With drug prices continuing to rise “uncontrolled,” according to Forbes, significant savings on prescription drugs is welcome to anyone’s home budget.
“Use It or Lose It”
Employees and employers alike need to be aware of the “use it or lose it” rules that accompany FSAs. Generally, employees must use all of their FSA funds by the end of the plan year or forfeit any remaining funds. However, two exceptions — the carryover option and the grace period — can give employees extra time to use their contributions, if added to the plan design. Employers must pick only one option to offer.
First, according to the IRS, the carryover option allows an employee to transfer $500 of unused contributions from one plan year to the next. For example, if an employee has $500 of unused contributions in 2018, then he or she may carry those funds over into the 2019 plan year.
Second, with the grace period option, an employee has 2 1/2 months after the end of the plan year in which to use his or her unused contributions. For example, if an employee has unused contributions at the end of a plan year (December 31, 2018), then he or she must use those contributions by the following March 15, 2019, or risk forfeiting them.
Employers should take the time to discuss the new flexible spending account rules and the FSA option itself — if offered — with their employees. According to CNBC, in 2015, only 32 percent of employees were using their FSAs in small companies, defined as 50-499 employees. The ability to save money on health care expenses at a pre-tax level is advantageous, and something that should be fully utilized. Employers — through communication and education — can help get these participation numbers up, while helping employees take advantage of a simple tax-savings vehicle.
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