Planning for a 2016 Flexible Spending Account (FSA)
As the end of the year approaches, it’s time to start planning ahead for next year’s health expenses. Whether it be copays, deductibles, certain medical products or services including vision and dental care to eye glasses and hearing aids, these are all typical qualified medical expenses that are covered by most flexible spending accounts (FSA).
Employees who participate in their employer’s health flexible spending account (FSA) during 2016 will be able to contribute up to $2,550, with a $500 carryover option available to many. Self-employed individuals are not eligible to participate in an FSA. Employees must decide the amount they wish to contribute through payroll deductions before the plan year begins. Employers may contribute to an employee’s FSA. The amounts contributed to the FSA throughout the year are not subject to federal income tax, Social Security tax, or Medicare tax.
At the start of the plan year, the FSA provides employees tax-free dollars that may be used to pay for qualified medical expenses that are not covered by their health plan. Employees should check with their employer for details on eligible expenses and claim procedures. Any money left in the employee’s account at the end of the year is forfeited, based on the use or lose provision. Special rules may permit employees more time to spend their FSA money.
In order for an employee to be granted more time to use their FSA, the employer may choose to participate in the carryover option or the grace period option. The carryover option allows an employee to carryover up to $500 of unused funds to the following plan year. The grace period option gives the employee an additional two and a half months after the end of the plan year to spend money on qualified medical expenses. Employers may choose to offer one or the other, but not both, or none.
FSA funds spent on nonqualified medical expenses will be subject to taxes and penalties.