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The following article was published in Your Health Magazine. Our mission is to empower people to live healthier.
Donald C. Bartnick, CMPE, CEO
Flexible Spending Accounts
Maryland Eye Associates
. http://marylandeyeassociates.com

Flexible Spending Accounts

Wouldnt it be great if you could designate part of your pay to be saved without paying taxes and then use that money to pay for your health expenses? You can if your employer establishes a flexible spending account (FSA).
An FSA is funded through a voluntary salary reduction agreement between the employee and the employer. The employee contributes this salary reduction amount to the flexible spending account. No federal income taxes, social security taxes or Medicare taxes are deducted from the employees contribution. In many states, these salary reduction agreements are free of state income taxes as well. Withdrawals from the FSA are tax free if the funds withdrawn are used to pay qualified medical expenses.
In the beginning of a plan year, the employee and the employer enter into a salary reduction agreement applicable for the entire year. This agreement cannot be changed during the year unless the employees status changes (for example, the employee gets married). Usually, the agreement specifies an amount of money to be deposited into the employees spending account each pay period. Due to IRS requirements, the entire amount for the year is available to the employee even before the account is fully funded.
With FSA plans, the amounts contributed to the account that are not spent by the end of the plan year are forfeited. Also, expenses reimbursed using funds from an FSA cannot be deducted on the employees 1040 form at tax time.
The above is a brief overview of a more complicated program with other restrictions as delineated in the U.S. Tax Code. There are requirements for the employer in establishing the plan and restrictions on the qualified health expenses that can be reimbursed with these funds. Nevertheless, the FSA is a very useful mechanism to pay for otherwise unreimbursed expenses with tax-free dollars.
An example of unreimbursed health expenses is LASIK laser vision correction. Figure 1 demonstrates how the use of an FSA can result in a reimbursement from the tax authority that effectively reduces the expense of LASIK.
In this example, the salary reduction of $4,000 results in a tax savings of $1,186. Using the FSA allows a reduction in the effective expense for LASIK surgery.
There are other unreimbursed medical expenses for which you can use an FSA. Most health insurance plans or HMO plans have copays, coinsurance amounts or deductibles. Many insurance plans dont cover all health care expenses. Vision care services, eyeglasses, contact lenses, the additional amount necessary to upgrade to a multifocal intraocular lens and hearing aids are just a few of the types of health care expenses that can be paid using a flexible spending arrangement. Remembering that the FSA requires a salary reduction agreement at the beginning of the plan year, the employee should consider setting aside the funds necessary to have surgical procedures like LASIK. In addition, as the end of the plan year approaches, the employee with an FSA should ascertain the balance remaining and assure that expenses are submitted for reimbursement so that the FSA funds are not forfeited.
Use your health plan and flexible spending arrangements wisely. Know your health plans requirements and coverages. Ask your employer if he/she has an FSA plan. Use flexible spending arrangements to help reduce your cost for health care.

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