Flexible Spending AccountImage of a PowerPay MasterCard

A Flexible Spending Account (FSA) allows you to set aside pre-tax dollars out of your paycheck to cover your eligible out-of-pocket health care expenses and dependent care expenses This offers you the following tax advantages:

  • Decreasing your taxable income
  • Reducing your FICA and federal unemployment taxes

How It Works

Each year, you choose the amount of pre-tax dollars you would like set aside from your paycheck. This is called your annual election contribution.

According to IRS regulations, once enrolled, you may only change the amount of your annual election contribution at the beginning of each plan year unless you experience a change in your family status, such as marriage, divorce, birth, adoption, death or a loss of spouse’s employment. Changes in the contribution amount must be consistent with the change in your family status. For example:

  • If you gain a dependent, you increase your contribution
  • If you lose a dependent, you decrease your contribution

If your benefits include an FSA, contact your Human Resources department if you experience a change in status.

The amount of money you save in taxes depends in part on the elections you have made. Calculate the total amount you elect to set aside in your account with care. Any money taken pre-tax must be used in the plan year to pay for qualified, elected benefits or it will be forfeited – there is a “Use It or Lose It” rule.

If you overestimate the amount you think you will spend on reimbursement benefits in a given year, you cannot:

  • Keep the unused money as cash.
  • Save the unused money for similar expenses in the following year.
  • Use the unspent money for any expense other than the type of expense. designated for it. That is, money designated for dependent care expenses must be spent on dependent care; money earmarked for non-covered, eligible medical expenses must go to medical expenses.

How much can I save?

You can contribute any amount between 25 percent and nearly 45 percent based on your net earnings. Consider the following: You earn $30,000 a year and spend $750 on non-reimbursable medical expenses and $4,000 on dependent care annually. You are married and filing a joint tax return:

EMPLOYEE TAX SAVINGS

Without FSA With FSA
Gross Salary $30,000 $30,000
FSA Health Contribution - -$750
FSA Dependent Care Contribution - -$4,000
Net Taxable Income $30,000 $25,250
Federal Tax ($4,500) ($3,787.50)
NY State Tax ($1,500) ($1,262.50)
FICA Tax ($2,295) ($1,931.63)
Net Income $21,705 $18,268.37
Health Care Expenses -$750 -
Dependent Care Expenses -$4,000 -
Net Spendable Income $16,955 $18,268.37
Additional Spendable Income with an FSA   $1,313.37

Resources

Questions?

Call (716) 505-8509 or
1-800-264-9115, Monday through Friday from 8 a.m. to 5 p.m. Eastern Standard Time.