FSA Flexible Spending Accounts

FSA - Flexible Spending Accounts - Publication 969
FSA – Flexible Spending Accounts – Publication 969
Dependent Care Benefits Publication # 503
Dependent Care Benefits Publication # 503

Plan now to Use Health Flexible Spending Arrangements in 2016; Contribute up to $2,550; $500 Carryover Option Available to Many  

  IR-2015-126, Nov. 12, 2015

WASHINGTON ― The Internal Revenue Service today reminded eligible employees that now is the time to begin planning to take full advantage of their employer’s health flexible spending arrangement (FSA) during 2016.

FSAs provide employees a way to use tax-free dollars to pay medical expenses not covered by other health plans. Because eligible employees need to decide how much to contribute through payroll deductions before the plan year begins, many employers this fall are offering their employees the option to participate during the 2016 plan year.

Interested employees wishing to contribute during the new year must make this choice again for 2016, even if they contributed in 2015. Self-employed individuals are not eligible.

An employee who chooses to participate can contribute up to $2,550 during the 2016 plan year. Amounts contributed are not subject to federal income tax, Social Security tax or Medicare tax. If the plan allows, the employer may also contribute to an employee’s FSA.

Throughout the year, employees can then use funds to pay qualified medical expenses not covered by their health plan, including co-pays, deductibles and a variety of medical products and services ranging from dental and vision care to eyeglasses and hearing aids. Interested employees should check with their employer for details on eligible expenses and claim procedures.

Under the use or lose provision, participating employees often must incur eligible expenses by the end of the plan year, or forfeit any unspent amounts. But under a special rule, employers may, if they choose, offer participating employees more time through either the carryover option or the grace period option.

Under the carryover option, an employee can carry over up to $500 of unused funds to the following plan year—for example, an employee with $500 of unspent funds at the end of 2016 would still have those funds available to use in 2017. Under the grace period option, an employee has until 2½ months after the end of the plan year to incur eligible expenses—for example, March 15, 2017, for a plan year ending on Dec. 31, 2016. Employers can offer either option, but not both, or none at all.

Employers are not required to offer FSAs. Accordingly, interested employees should check with their employer to see if they offer an FSA. More information about FSAs can be found in Publication 969 , available on IRS.gov.

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3 comments on “FSA Flexible Spending Accounts

  1. 1. I elected to put $2400/yr into a dependent care FSA.

    2. At the end of June, I had a qualified life event (my husband got a new job and it paid much less than his old job) and my company’s HR dept allowed me to make changes to my benefit elections mid-year.

    3. With my husband’s income reduced, we would no longer be able to afford expensive daycare after school, but would need to move to a cheaper option (ASP program at the school instead of private day care), so I stopped contributions to the dependent care FSA.

    4. Unfortunately, I already signed the kids up for summer camps in April and May so there was no getting out of that expense. I had $1,200 in my dependent care FSA at the time of this change (1/2 the yr).

    5. When I submitted my claims for the summer day camps, they were denied because the camps didn’t take place until July/Aug and I no longer had dependent care FSA coverage.

    6. Since I contributed that money, and I’m still with my employer, don’t I have the whole year to use the funds I contributed at the beginning of the year before the qualified life change?

    • This question at present is beyond my pay grade. I suggest you check with your plan administrator. My guess is that when you cancelled your contribution to the Dependent Care FSA, you cancelled the plan and LOST the $$$. Is it possible to undue your cancellation and only spend $2,400 on day care? What’s better to contribute more $$$ or lose the $1,200?? Be sure to check with competent tax counsel and read your full Summary Plan Description.

      Change in Status Events

      Your election cannot be changed during the plan year, unless you experience a qualifying change in status event based on IRS regulations, such as:

      A change in legal marital status (marriage, divorce or death of your spouse)
      A change in the number of your dependents (birth or adoption of a child, or death of a dependent)
      A change in employment status of you, your spouse or dependent
      An event causing your dependent to satisfy or cease to satisfy an eligibility requirement for benefits

      Your requested change must be due to and consistent with the event, such as increasing your election amount after having a baby. You may change or terminate your DepCare FSA election only if:

      The change or termination is due to and corresponds with a change in status that affects eligibility for coverage under the FSA plan.
      Your election change is due to and corresponds with a change in status that affects the eligibility of dependent care expenses for the available tax exclusion.

      You may also change your DepCare FSA election when an independent, third-party provider (other than a relative) significantly increases or decreases the cost of dependent care or when there is a coverage change, such as using another provider.

      IMPORTANT:For more information regarding eligible status change events under your plan, see your Summary Plan Description (SPD).

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      Unused FSA Funds

      Your FSA contributions are subject to the IRS “use-it-or-lose-it” rule. Any unused funds that remain in your DepCare FSA will be forfeited at the end of the plan year. FSA funds do not rollover to the following year. The unused funds cannot be paid to you in cash or other benefits.

      Your FSA plan includes a run-out period and a grace period extension. These features can help you avoid losing funds through the “use-it-or-lose-it” rule.

      IMPORTANT! IRS rules do not allow a DepCare FSA to have a carryover feature. Only the Health FSA has a carryover. http://uc.conexisfsa.com/Dependent_Care_FSA_Guidelines.html

    • Shannon,

      Without knowing what your Plan Document says or your plan rules (which your HR team can confirm and/or give you), typically, you can only use the monies you had ($1,200) for costs that were incurred before you changed your election amount. Once you changed the amount and stopped contributing, you could only use those monies for events that happened prior. Check with your Employer, but you should be able to file claims for any costs you had before you made the change.

      Editors Note – Jen K is Sales Director at http://www.DiscoveryBenefits.com so we certainly have an expert opinion here.

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