Health care, thanks to the Patient Protection and Affordable Care Act, has been quite the hot topic. Managing employee benefits and their associated costs, has never been more important. Employers and employees should be careful not to leave any money on the table when it comes to tax savings.
Flexible spending arrangements, or FSAs, have been around almost 30 years. Setting aside pre-tax dollars for medical out-of-pocket expenses and dependent care expenses, benefits about 35 million Americans each year. Tax savings on FSAs have played an important role in managing health care expenses; however, the biggest deterrent has been the “use-it-or-lose it” rule associated with health flexible spending accounts.
In 2013, several changes were made affecting FSAs for the future. The U.S. Patient Protection and Affordable Care Act set a $2,500 cap on plan contributions to FSAs starting in 2013 and prohibited using FSA contributions for purchase of over-the-counter drugs without a prescription. Later in the year, the IRS and Treasury Department loosened the plan restrictions by allowing plan participants to carry over as much as $500 of their balances into a new year.
The new rule does not eliminate the 2 ½ month grace period for unused funds which employers could offer before, but does require the employer to choose one or the other (grace period or a carry-over, but not both).
With all of the changes since the introduction of the Affordable Care Act, employers and employees continue to look for ways to better manage health care costs. With changes in the “use-it-or-lose-it” rule, plan participants can feel more comfortable utilizing these plans. There have been no changes to Dependent Care FSA regulations, and these plans are often under-utilized.
Dependent Care FSAs also yield great tax advantages, allowing a maximum of $5,000 annually for contributions. In addition, the IRS allows an income tax credit up to $3,000 for dependent care expenses if you have one dependent (up to $6,000 for two or more). So, while the maximum allowed under a Dependent Care FSA is $5,000, participants may be able to apply the Child and Dependent Care Tax Credit for amounts over that limit- depending on their tax situation. Employees that pay for expenses related to care for a child, disabled spouse, elderly parent, or other dependent that is physically or mentally incapable of self-care, so they can work, should consider a Dependent Care FSA if offered by their employer.
Millions of Americans are taking advantage of these tax-advantaged plans through their employers. Employers look to their advisors, payroll providers, and insurance brokers for advice and recommendations on the benefits they offer. Many members of the MPAY Network offer Benefits Management and assistance with these programs. If you are an employer looking for assistance with Flexible Spending Accounts, email us at [email protected] to get in touch with a member of MPAY’s Network.
If you’re a member of the MPAY Network and not yet offering FSAs, contact us to learn more about partnering with MPAY. In last week’s blog, I talked about the importance of cross-selling a full suite of solutions to ensure clients have everything they need. Here’s what MPAY Network Member Jim Ritter (QTS Payroll Services Inc.) had to say- “MPAY’s new pricing structure for COBRA and Flex products allows us to offer an excellent ancillary service at a price point that makes sense for our clients. Their approach to marketing support is a true partnership and the DocuSign contract process is very professional. They make us look good!”
Download our brochure to learn more about FSAs. If you’re already a partner for these services in the MPAY Network, email our marketing team ([email protected]) to request this brochure in .pub format for your own custom branding!