The Internal Revenue Service (IRS) raised the contribution limit for 2015 health flexible spending accounts (FSAs) as part of its annual inflation adjustments. Employees can contribute $2,550 annually to an employer-sponsored FSA, up from $2,500 in 2014. The annual limit for dependent care FSAs stays the same at $5,000.
What is an FSA?
An FSA allows employees to pay for out-of-pocket medical, dental, and vision expenses with pre-tax dollars. Account balances can be used to pay for qualified over-the-counter health products, eye care costs, prescription drugs, and physician office visits, among other expenses.
Individuals can contribute to an FSA regardless of the type of health plan they have. This is different from a health savings account (HSA), which is for individuals with high-deductible health plans only.
Benefits of an FSA
Employees can contribute a set amount of pre-tax dollars toward their FSA balance to cover expected or unexpected medical expenses. This may give employees more take-home pay by paying less in taxes.
Employers also benefit from offering FSAs to employees. Employers pay less in their portion of FICA and FUTA payroll taxes, as employee contributions are not subject to these taxes.
Carryover or grace period option for balances
Health FSAs are subject to the use-or-lose rule, which means that at the end of the year, any unused account balances are forfeited. However, the IRS regulations provide two options which may reduce or eliminate possible participant forfeitures.
Employers can choose to allow employees to carry over up to $500 of unused FSA funds for the following year or allow employees a grace period of up to two and a half months in the following year to use remaining funds. Employers are not required to offer either option, and a health FSA cannot have both a grace period and a carryover. The carryover option does not apply to dependent care FSAs.
Because of the FSA rules, it's important for employees to accurately estimate their expected health care costs to determine an appropriate contribution amount. Remind employees to consider all known costs for 2015, such as glasses or contacts, prescription drugs, planned surgeries or procedures, dental cleanings or treatments, and any other known medical expenses.
FSAs are a great option for employees and employers to save on health care costs. Paychex offers services to help businesses establish and manage FSAs for employees.