Flexible Spending Accounts (Section 125)

In the United States, employees can have flexible spending accounts set up through their employers. Under Section 125, as an employee, you can take advantage of a cafeteria plan to have a portion of your earnings set aside to help pay for expenses.


1. Cafeteria Plan of Section 125

Under Section 125 of the Internal Revenue Service, employers can set up and administer a cafeteria plan for their employees. The employees have the opportunity to receive certain benefits and not have to pay taxes on the money they have deducted for their flexible spending account. In order to sign up for this program, you do have to choose at least one taxable benefit and one qualified benefit. The IRS has a cap of $5000 placed on the amount you can contribute to the account.

The qualified benefits for flexible spending accounts include such things as assistance with adoption, medical expenses, assistance for care for dependents, insurance coverage for group life, and health savings accounts. There must be a written plan in place for the account to take effect. Employers are only allowed to offer employees an opportunity to choose between taxable and non-taxable benefits through a Section 125 plan. As a participant in a plan under Section 125, you can choose benefits that are more important to you and elect not to have others included in the plan. In this way a flexible spending account can be tailored to meet the needs of individuals. This plan also gives you a $50,000 life insurance policy.

2. Medical Flexible Spending Accounts

Most employees choose a medical flexible spending account. This is because it provides insurance for medical services that are not usually covered under usual health plans. Under such a plan, you can have dental and vision coverage, as well as coverage for the cost of prescription medications. However, the plan does not cover the cost of a health insurance plan nor do the benefits include the cost of cosmetic surgeries or items. The health care expenses covered under Section 125 administration must be used to treat a medical condition, whether it is serious or not. Some over-the counter medications qualify under the medical plan, such as antacids, allergy medication, pain relievers and cold medicine.

Since the money deducted from earnings is tax-free, you can take advantage of Section 125 administration to help pay for claims that would otherwise have come out of your earnings after taxes. This helps give you more peace of mind knowing that you do have the monies available in your flexible spending accounts should a medical emergency arise.

3. Dependent Care FSA

Paying for the care of dependents is often a problem that many workers have to deal with. With a Dependent Care flexible spending account, Section 125 allows for the establishment of a benefit that will help pay for some of these expenses. It usually refers to childcare, but can also be used for caring for adults, such as aged parents. These expenses do not apply to summer camps for children or for the cost of seniors in a long term care facility. The dependent expenses cover the cost of daily care where you go home after work and can take over the care for a period of time. One of the requirements of this plan is that the dependents live with you in your home. You also have to enroll in the program within thirty-one days, of the first month, of beginning employment.

The way a dependent care flexible spending account works is that you have money deducted from your earnings every pay period and then deposited into the account. You continue to pay the expenses related to caring for your children or adults you look after as usual. At the end of a period of time, such as six months or a year, or for individual expenses, you submit a claim for the expenses and receive reimbursement. However, you can only be reimbursed up to the amount of money you have in your account. In the case of married couples with both spouses contributing to a plan, the total amount contributed to the plan cannot exceed $5000 in a calendar year. Even if only one spouse is employed, the monies from the dependent care account can be used to help the other partner to look for work or attend school.

4. Eligible Expenses for Dependent Care

Any expenses you claim for reimbursement from the flexible spending account for dependent care cannot be claimed again for the dependent care tax credit on your income tax return. In this way, the IRS can eliminate the possibility of double dipping. The IRS also provides a list of eligible and ineligible expenses for this account.

Some of the expenses that are deemed eligible include the cost of nursery school, day care, and care for children in your home or another private home. While you cannot claim the costs of sending your child or children to summer camp where they stay for weeks, you can claim the cost of a summer day camp if the cost is comparable to other childcare options open to you. In the case of adult dependents, some of the costs that are eligible include housekeeping services and in-home care for that person while you are working. Ineligible services include school expenses for children, such as school supplies, school lunches or clothing and transportation costs to and from school or the day care center.

5. Coverage Period under Section 125

It is important for you to pay attention to the period of coverage for your flexible spending account. The length of the plan will be specified in the written contract with the Section 125 administration of the plan. For full time employees, this will be the calendar year or a year from the date when they enrolled in the plan. For part -time employees, the coverage ends when the employment ends.

You also have to be aware of the deadline for submitting claims for reimbursement. Under the regulations of Section 125, the deadline for submitting expense claims is February 28, if your plan runs for a calendar year. Any money you have remaining in your flexible spending account after March 1 will be forfeit. You can also only claim for a reimbursement after you have received and paid for the eligible services.

6. Pre-Funded FSA's

Medical flexible spending accounts can be pre-funded by the employer. This means that if you have enrolled in a plan and your contributions throughout the year will total the allowable limit of $5000, you can avail of this right away. You don't have to wait until the year is up to be able to take advantage of the monies in your account. Therefore, if a medical emergency occurs in January, you know that you have the coverage to help you pay the expenses without having to wait until you have all the deductions taken out of your earnings. However, this applies only to medical plans. They do not apply to dependent care accounts, for obvious reasons. Undoubtedly you know how much money you have to pay out for childcare throughout the year and should have it budgeted in your monthly finances.

7. Using an FSA Debit Card

To make things easier for you to take advantage of the funds you have built up in your medical flexible spending account, you can use an FSA debit card instead of having to submit claims for all expenses. This allows you to pay for prescription drugs using the card rather than have to pay for them and wait to be reimbursed.

Under Section 125, the IRS limits where the debit cards for the flexible spending accounts may be used. Even though they do carry a Visa or Mastercard symbol, they cannot be used at every location that accepts these credit cards. According to the IRS, the cards can only be used at medical and dental facilities. There are some merchants who have been deemed eligible and they will display a sign stating that they accept the FSA debit cards. As of January 1, 2008, all pharmacies, both online and off, will be able to accept the cards once they install an IIS, which is necessary to process the debits form the cards. Once you do use the debit card, you may have to submit the receipt to your employer because the amount spent has to be verified as being for medical reasons.

8. Advantages for Employers

Employers can benefit from offering the option of enrolling in a flexible spending account to their employers. At first glance, it may seem that it is costly for the employers to offer these plans, but when you look closer you can see how they can benefit. Any employee that enrolls in the program can have up to $5000 per year deducted from earnings and deposited into the account. This requires more work on the part of the employer in the Section 125 administration of the plans. As a participant, if you spend all the money in your plan, you won't be able to use the plan for the rest of the year. However, any money left in your plan at the end of the year reverts to the employer. Many employers use this money to help pay for the administration of the plan. They also receive tax savings throughout the year, which helps to pay for the plan.

9. Changing Allotments during the Year

If your circumstances change during the year, you can make changes to the amount of money you have deducted from your pay for your flexible spending account. Spouses who both pay into the plan, for example, can only deposit $2500 each per year. If, during the year, you become divorced, separated or one of the partners passes away, then you can change the amount of money you have deducted because you will then be allowed to contribute the full amount of $5000 yourself. On the other hand, if you get married during the year, you have to make changes in the deductions in order to meet the requirements of the IRS and lower the deductions for each partner.

Some of the other circumstances that would warrant a change in the allotments you have specified in your contract include the addition of a dependent in the birth of a child or an adoption, a change in the eligibility of the dependent (children over the age of thirteen are not eligible for dependent care), a change in the cost of childcare or a change in your employment status. You will also have to make changes if you changed providers for the Section 125 administration. All of these changes are called Qualified Life Events and are the only ways you can make changes in your allotment. For all changes you only have sixty days from the date of the event to request the changes and in all cases it cannot be later than October 1 of any benefit period.

A flexible spending account does not replace your usual health care insurance policy. It is intended to help pay for out of pocket expenses you may occur or those that may not be covered under your policy. The dependent care plan is intended to help allay the costs associated with childcare in families where both parents are employed or where they are responsible for looking after their parents. You can tailor the account to meet your needs so that you know that your immediate needs will be taken care of if the need arises. At the same time, you will also realize considerable savings on taxes within the year.
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