IRS Flex Spending Account: A Yearly Tax Break

The IRS Flex Spending Account is a great way to save money on taxes. You can set aside up to $2,850 per year for medical expenses, which can add up quickly.

This account can be a huge help for people with ongoing medical expenses, like prescription medication or doctor visits. Many people use it to pay for things like glasses or contact lenses.

One of the best things about Flex Spending Accounts is that the money you put in is tax-free. This means you get to keep more of your hard-earned cash.

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An FSA, or flexible spending account, is an employer-sponsored benefit that allows employees to set aside a portion of their pre-tax salary.

This means you get to reduce your taxable income, which can lead to significant savings on eligible expenses.

FSAs are designed to help you save money on qualified medical expenses or dependent care expenses.

You decide how much to contribute to the FSA each year, and your funds can be used for a wide range of eligible expenses.

By contributing to an FSA, you can reduce your taxable income, which can lead to lower taxes owed at the end of the year.

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The maximum amount you can put into an FSA in 2024 is $3,200, which is an increase from $3,050 for 2023.

You'll need to enroll with your employer's benefits office each year to continue participating in this benefit, as enrollment does not automatically carry over from one year to the next.

To get started, you'll need to determine how much you want to put into the fund, and then have your employer deduct that amount from your paycheck every month.

Here are the key FSA regulations and rules to keep in mind:

The IRS has increased the $500 limit for 2020 and later years to an amount equal to 20% of the maximum health FSA salary reduction contribution for the plan year, which is $550 for 2020.

Employers have the option to allow employees to carryover unused healthcare and dependent care FSA balances, and the Consolidated Appropriations Act allows for a 12-month grace period for tax years 2020 and 2021.

You can carryover up to $550 contributed in 2020 to 2021, as long as the employer offers this option and amends the plan by the end of the 2021 plan year.

The use-it-or-lose-it rule is not carved in stone, and the IRS offers employers the option to allow employees until March 15 of the following year to use FSA funds from the previous year.

Employers can also let their employees rollover up to $500 in unspent FSA money into the following year, or provide a 12-month grace period for carrying over unused healthcare and dependent care FSA balances.

If you have questions about any of these rules, you can contact Carl Lammers or another attorney in Frost Brown Todd’s Employee Benefits & ERISA practice group.

Before reaching out, keep in mind that contacting them does not create an attorney-client relationship, and you should not send any confidential information until you receive a letter from them agreeing to represent you.

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Funding a Flex Account can be a bit tricky, but don't worry, I've got the lowdown.

The maximum amount you can put into an FSA in 2024 is $3,200, which is an increase from $3,050 for 2023.

You'll need to enroll with your employer's benefits office every year to continue participating in this benefit, as enrollment doesn't continue automatically from one year to the next.

To get started, simply determine how much you want to put into the fund and have your employer deduct the amount from your paycheck each month.

Your employer will handle the deductions, making it easy to contribute to your FSA without having to lift a finger.

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FSA elections and changes can be a bit tricky, but don't worry, I've got you covered. You can usually only elect contributions to your FSA during open enrollment, but there are some exceptions.

A change in marital status, number of tax dependents, employment, or residential change can allow mid-year contributions. This means you might be able to make changes to your FSA election during the plan year if your personal situation changes.

You can carryover up to $550 contributed in 2020 to 2021, as long as your employer offers this option and amends the plan by the end of the 2021 plan year.

Here are some situations where you can make mid-year changes to your FSA election:

Remember, these changes are optional for employers, and a plan can be amended to implement all, none, or just a few of these rules.

The IRS has increased the $500 limit for health FSA carryovers to an amount equal to 20% of the maximum health FSA salary reduction contribution for the plan year, which is $550 for 2020.

Employers can amend their plans to allow carryovers of up to $550 contributed in 2020 to 2021, but this is optional and must be done by the end of the 2021 plan year.

The IRS normally allows up to a $640 carryover in 2024 of medical FSA funds from one plan year to the next, but employers determine whether their medical FSAs include a carryover.

Unused funds at the end of the plan year are forfeited to the plan, so it's essential to spend most or all of your FSA funds by the end of the plan year.

Employers can choose to implement, reject, or partially adopt these carryover rules, giving them flexibility in managing their plans.

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Changing your FSA election during a plan year is possible, but it's not as simple as just making a change. You can only elect contributions to your FSA during open enrollment, unless you experience a qualifying life event.

A change in marital status can qualify you to make a mid-year contribution change. This can be a marriage or divorce. You'll need to provide proof of the change to your employer.

A change in the number of tax dependents can also allow you to make a mid-year contribution change. This can be a new baby or a child moving out. You'll need to update your W-4 form with your employer.

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Employment changes can also qualify you to make a mid-year contribution change. This can be a new job or a change in your work status. You'll need to provide proof of the change to your employer.

Residential changes can also qualify you to make a mid-year contribution change, if your coverage eligibility is affected. This can be a move to a new state or a change in your address. You'll need to provide proof of the change to your employer.

Here are the common qualifying life events that allow you to make a mid-year FSA contribution change:

With an FSA, you save money on taxes. If you earn $50,000 a year and contribute $2,000 to an FSA, you'll have a tax savings of $600 if your tax rate is 30%.

You can calculate your tax savings by determining the percentage of taxes you'd pay on the money you contribute to your FSA.

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The FSA administration and management process is overseen by the IRS, which sets the rules and guidelines for FSAs.

The IRS requires employers to report FSA contributions on the employee's W-2 form, and employers must also provide a written plan document to the IRS for approval.

Employers are responsible for administering and managing FSAs, which includes setting up the plan, communicating with employees, and ensuring compliance with IRS regulations.

A grace period is an extension of time beyond the end of the regular plan year in which FSA participants can incur new expenses and use any remaining funds from the previous plan year, lasting up to 2½ months after the end of the plan year.

Employers can choose to offer either a grace period or a carryover, but not both. If they choose neither, any remaining funds in the FSA at the end of the plan year are forfeited.

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A run-out period allows FSA participants to submit claims for eligible expenses incurred during the plan year, but it does not allow for new expenses to be incurred during that time.

Employers can choose to offer a run-out period, which can be a specific time frame after the end of the plan year, allowing participants to request reimbursements for expenses they may have incurred close to the end of the plan year but haven’t submitted for reimbursement yet.

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The IRS allows employers to let employees rollover up to $500 in unspent FSA money into the following year, giving you more time to use those funds.

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