Regardless of what type of insurance you select, there will always be medical or dependent care expenses that are not covered. These can include physician visit copays, prescription fees, annual deductible and childcare expenses.
Flexible spending accounts (FSAs) allow you to set aside a portion of your salary into an account to pay for eligible expenses. The portion of your income contributed to this account is not taxed which means you pay no federal, state or Social Security taxes. This results in a reduction of your taxable income and more take home pay.
The process is easy. From each paycheck, you contribute a set dollar amount. This goes into your account for use on qualified, non-covered expenses. When you need to pay for an expense, you will use the Benefits Debit Card which works just like your checking account debit card. The fee will be transferred from your card to the service provider. As an added benefit, your FSA allows you to use your full annual pledge immediately which means you can use the card early in the year to help pay for qualified out-of-pocket expenses before your annual deductible is met.
There are two types of Flexible Spending Accounts. You can elect to contribute to one, both or neither.
Health Care Flexible Spending Account (HCFSA) – These funds can be used to pay for eligible medical, pharmacy, dental, vision and hearing expenses that are not covered by your insurance for you and your dependents.
Dependent Care (day care) Flexible Spending Account (DCFSA) – This account can help pay for eligible child care (up to age 13) and elder care expenses that you incur because you and your spouse work.
During benefits enrollment, you can contribute any amount from $100 to $2,500 to a healthcare FSA, and from $100 to $5,000 annually to a dependent care FSA. To determine how much to contribute, calculate your annual spending on copays, coinsurance, eyeglasses, contact lenses, orthodontia, chiropractic care, and eligible over-the-counter drugs. Due to strict IRS rules on Flexible Spending Accounts, all funds must be spent within the designated calendar year. Because of the “use it or lose it” provision you are encouraged to contribute no more than you are likely to spend in the coming year.
Because FSA contributions are made with pre-tax dollars, your savings are substantial. If your taxable income is $35,000 and you deposit $1,500 into your FSA, your taxable income is now $33,500. This provides more than $450 in tax savings. You can then use that $1,500 for your son’s braces, your glasses and contacts, physician co-pays or any other eligible expense.
You will receive the Benefits Debit Card automatically when you enroll in a Flexible Spending Account. The card offers easy access to your flex funds and allows you to pay for out-of-pocket expenses at time of service. It is essential that you save all receipts and respond to requests from Discovery Benefits to substantiate (document) transactions processed with your FSA debit card. Based on IRS guidelines, failure to respond to substantiation requests will result in the claim amount being processed as taxable income to you.