Late in 2016, the Internal Revenue Service released an announcement to remind eligible employees to commence their tax planning to take full advantage of their employer’s health flexible spending account, also known as a flexible spending arrangement (FSA), during 2017. A qualified tax professional may offer complete assistance to any working taxpayer fortunate enough to have access to an FSA. Employers are not required to offer FSAs. Thus, interested employees should consult with their employer for more information.
An FSA is one of many financial accounts that an employee may create through an employer’s cafeteria plan. It allows part of an employee’s earnings to be set aside to pay for qualified expenses as established by the cafeteria plan. Typically, these expenses are for medical and dependent care costs. FSA deductions are not subject to payroll taxes, thus resulting in their primary benefit – substantial savings in payroll taxes.
A flexible spending arrangement provides employees with a means to use this tax-free income to pay medical expenses not covered by other health insurance plans. Eligible employees must choose the amount that they wish to contribute through payroll deductions before the plan year begins.
This past fall, many employers offered employees the opportunity to participate in FSAs for 2017. This choice must be made even if an employee contributed to an FSA in 2016. Self-employed individuals are not eligible for flexible spending accounts.
Employees may contribute up to $2,600 during the 2017 plan year. These amounts are not subject to federal income tax, Social Security tax or Medicare tax. Employers may also contribute to an FSA if the plan provisions allow such contribution.
During 2017, employees may utilize their FSA contributions to pay qualified medical expenses not covered by their health plan. This may include co-payments, deductibles and many medical products and services. Employees should consult with their employer for information related to qualifying expenses and other procedures.
Flexible spending arrangements are typically subject to a “use or lose” term which mandates that plan participants must incur eligible expenses by the end of the plan year, or lose any unused funds. There is an exception to this rule as employers may, by their own choice, offer more time for the expenditure of these funds through a carryover or grace period option.
Employers may offer either the carryover or grace period option, but not both. Employers may also choose to offer neither of these options. The carryover option allows employees to carry over up to $500 of unused funds to the following plan year. The grace period option permits employees 2½ months after the end of the plan year to incur eligible expenses. Thus, March 15, 2018, for a plan year ending on December 31, 2017, would be the plan’s deadline for spending plan funds.
It is wise for both individual and business taxpayers located in the Tri-State area to consult with a tax professional to help assess their current tax situation. If you have any questions about taxes, especially with tax filing season already here, call THE TAX EXPERTS at the Thorgood Law Firm www.thorgoodlaw.com. For a FREE consultation call 212-490-0704.