It's Good to Be Flexible!

A Flexible Spending Account (FSA) is a tax-advantaged financial account that allows an employee to set aside a portion of his or her earnings to pay for qualified expenses. Money deducted from the employee's pay into an FSA is not subject to payroll taxes, which results in a substantial tax savings.

Be sure employees know the rules

FSA facts:

• They must be established by the employer
• They can be offered with other company benefits as part of a cafeteria plan
• Employer contributions can be excluded from gross income
• Federal or employment taxes are not deducted
• Decision of contribution must be made at the beginning of the plan year
• Distributions can be made at any time of the year regardless of amount paid in
• The annual contribution amount must remain the same throughout the year unless qualifying events occur, such as the birth of a child or death of a spouse

Types of FSAs

• Medical expenses: Use to pay for expenses not covered by your health insurance
• Dependent care: Use to help defray costs of dependent care

The "Use It or Lose It" rule

It's imperative that employees understand the one major drawback of FSAs--the "Use It or Lose It" rule. The money put into an FSA must be spent within the coverage period, and any money that is left unused at the end of the coverage period is forfeited back to the company. In addition, if any funds are forfeited, taxes must be paid on the unused portion.

To learn about other payroll issues--such as safe harbor and "reasonable basis" and the important differences between employees and contractors--plan on attending the SkillPath seminar Payroll Law Update coming soon to a city near you.

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