Overlooked Savings: Healthcare and Dependent Care Flexible Spending Accounts

Flexible Spending Accounts are a money saving benefit that can be easily misunderstood by employees as “just another deduction” from their paycheck. However, the tax savings from using a Flexible Spending Account (FSA) reduces their costs on medical, dental, vision, and child or elder care expenses by allowing them to pay for these products and services using pre-tax dollars. According to Ceridian Benefits Services, participants typically save an average of 30% on their healthcare and dependent care costs.

The two plans (Healthcare and Dependent Care) work a little differently, but both deductions are taken from the employee’s paycheck, pre-tax, and employees can either file claims for reimbursement or utilize a debit card (available for the Healthcare Account only) to access their funds. Administration is easy as accounts can be viewed online, claims can be filed via email or fax, and direct deposit for claims reimbursement is available.

How does the Healthcare Account work?

Employees must submit a new enrollment form every year, electing their annual amount for the Healthcare Account. The annual limit for the Healthcare Account is set by the employer. This annual election amount is split up over the pay periods throughout the year. With the Healthcare Account, the full annual election is available immediately, on January 1st. For example, an employee who elects $2,400.00 for the year would be able to utilize the funds in January for a surgery. Assuming they are paid on a semi-monthly basis (24 pay periods per year), they would be deducted $100.00 per paycheck throughout the course of the year. The benefit to this is that the employee has the full amount available immediately for any emergencies or expensive services, but is paying for that amount in “installments.”

Funds can be used for any qualified medical expense, which includes medical, dental, and vision co-pays or deductibles, prescriptions, costs for acupuncture, chiropractic services, psychotherapy, hearing exams, over-the-counter drugs, mileage to and from medical services, and smoking cessation drugs/programs, just to name a few. As these are expenses that most people accrue in the course of a year, it makes sense to pay for those expenses with pre-tax dollars rather than post-tax dollars. For convenience, most FSA custodians have a debit card available for use with the Healthcare Account. If a vendor does not accept the debit card, employees can pay out of pocket and file a claim for reimbursement. For this reason and in case of an audit, it is vitally important to save all receipts and back up documentation on qualified expenses. Occasionally, to validate an expense, the FSA custodian will request a copy of an itemized receipt and verification of payment.

Claims for the year can be submitted up to 90 days after the close of the year. This means employees have until March 31st, 2010 to submit claims for service dates of January 1, 2009 – December 31st, 2009. After the March 31st, 2010 date, no further claims will be accepted and the 2009 FSA year is closed.

How does the Dependent Care Account work?

For this plan, employees must also submit a new enrollment form each year, electing their annual amount. The IRS sets the annual limit for the Dependent Care Account, and for 2010 the limit is $5,000.00. As with the Healthcare Account, the amount is split up evenly throughout the year. However, the money must be deposited into the account prior to a claim being filed. This is casually referred to as “money in, money out.”

Dependent Care expenses are for child care OR elder care, and can include day-care, babysitters, in-home care, nursery or preschools, after school programs, etc. A receipt must be submitted with a claim filing and no debit card is available for this account.