Flexible Spending Account FAQ
Most Common Questions About I.R.C. Section 125
What are pre-tax dollars?
What types of expenses are eligible through Section 125?
This sounds too good, what are the risks?
What documentation is needed when sending in the Request for Reimbursement?
Can I participate in the Spending Account if I’m not on the health plan?
How long does it take to be reimbursed from the Un-reimbursed Health Account?
How long does it take to be reimbursed from the Dependent Care Account?
What happens if I submit a claim for more money than I have in my Dependent Care Account?
How long do I have after the end of the Plan Year to request money from my account?
Do I have to claim any of my expenses on my year-end taxes?
Is there a catch-all phrase that describes whether or not an expense would be eligible?
Can I change my deduction for child-care mid-year?
Can I pay my child to watch my other kids and claim it as an eligible expense?
Is this better than the tax credit?
Q1 What are pre-tax dollars?
A1 Pre-tax dollars are those that are reduced from your gross earnings before any taxes including FICA are computed. Because your taxable income will be lower, your Federal, State (if applicable) and Social Security taxes will also be lower. The net effect is more spendable income and in some cases more take home pay as well.
Q2 What types of expenses are eligible through Section 125?
A2 There are three separate areas that are eligible:
- Payroll Deducted Premiums; Section 125 allows for payment of these premiums with pre-tax dollars. Nothing will change as far as your coverage, only how it is deducted from your salary. This benefit will reduce the net cost of your insurance premium
- Un-reimbursed Health Expense Account; This part of the plan allows you to reduce your gross salary to pay for health care expenses that are either not covered or only partially covered by your insurance plan. The account works similar to a payroll savings for health care. As you know there are risks involved with this portion of the plan. Those risks will be covered in more detail in the following questions.
- Dependent Care Expense Account; The most common expense is child-care. The Section 125 plan allows daycare expenses to be deducted from the employee’s paycheck before tax. In many cases this will be more advantageous than the federal tax credit. Again, there are some risks in this type of plan. If you pay for child-care then you need to seriously consider using this benefit. Talk with your tax advisor as to which way is better for you.
Q3 This sounds too good, what are the risks?
A3 There are IRS regulations to follow if you elect to participate in the Un-reimbursed Health or Dependent Care Expense Account.
- One option per plan year. Once you’ve made your election to the Spending Account you can not change the amount until the next Plan Year. For the Payroll Deducted Premium and Dependent Care Accounts you can make a change if you experience a change in your family status as outlined in the Summary Plan Description.
- Use it or lose it. This is the rule that scares the most people. If you allocate money to one of the spending accounts and then do not use the money during the Plan Year the money is then forfeited back to your employer. Amounts do not carry over to the next Plan Year. Be conservative in your estimates. This rule should not stop you from participating. It should make you cautious as well as cause you to evaluate your health care needs for the coming year.
- Expenses must be incurred within the Plan Year. To be eligible for reimbursement a Health or Dependent Care Expense must be incurred during your Plan Year. This is not when you pay the bill, this is when the service was rendered.
- Expenses paid for through the Section 125 program can not be used as a tax deduction at the end of the year.
Q4 What documentation is needed when sending in the Request for Reimbursement?
A4 To be reimbursed the participant must submit documentation of their expenses along with the request form. Documentation can include a copy of the bill or Explanation of Benefit form from the insurance carrier. Documentation must include the cost and date of service. Canceled checks, past due notices or receipts are not acceptable documentation.
Q5 Can I participate in the Spending Account if I’m not on the health plan?
A5 You can if you’re eligible for benefits. Your employer has certain eligibility requirements for all benefits. Your human Resource person can assist you.
Q6 How long does it take to be reimbursed from the Un-reimbursed Health Account?
A6 Approximately one week from request.
Q7 How long does it take to be reimbursed from the Dependent Care Account?
A7 Manley Services must wait for your contribution before reimbursing you. This means that the reimbursement check will come to your home in approximately one week from your payday.
Q8 What happens if I submit a claim for more money than I have in my Dependent Care Account?
A8 Manley Services will reimburse you the funds that are in your account, and then hold the rest of the reimbursement until money has been deducted from your check. Manley will then automatically reimburse you the remaining balance.
Q9 How long do I have after the end of the Plan Year to request money from my account?
A9 You have 90 days following the end of the Plan Year to request for expenses incurred during the preceding Plan Year.
Q10 Do I have to claim any of my expenses on my year-end taxes?
A10 Only the Dependent Care expenses must be reported to the IRS. This is done on the same IRS Form that is used for the Dependent Care Tax Credit. The Health Care expenses are not reported, however you may not claim health expenses that are run through the Section 125 Plan on your tax form.
Q11 Is there a catch-all phrase that describes whether or not an expense would be eligible?
A11 No. However, for health care it will probably be eligible if the procedure is medically necessary to treat a specific ailment or injury and is not covered or partially covered by your health plan. The best advice is to check with Manley and use the resources available to them at our toll-free number.
Q12 Can I change my deduction for child-care mid-year?
A12 Only if you experience a qualified Family Status Change. This includes Marriage, Divorce, Birth, Death, Adoption, a spouse changing employment or your changing jobs or shifts which would directly affect your child-care.
Q13 Can I pay my child to watch my other kids and claim it as an eligible expense?
A13 The IRS does not recognize payment you make to dependents who live in your home. If your child was no longer a dependent, then, yes. Note: The rules that are applied to the Section 125 Dependent Care Plan are the same rules that are enforced when applying for a tax credit for dependent care.
Q14 Is this better than the tax credit?
A14 In most cases yes. A general rule of thumb is that if your family taxable income puts you into the 28% Federal tax bracket this plan will save you more than twice what would be available through the tax credit. Also if you have only one child in daycare and pay more than $200 per month then the savings available to you would be greater than the credit. You may deduct from your taxable income up to $5,000 annually for dependent care through the Section 125 program. Consult with your personal tax advisor.
There are many regulations that deal with the Section 125 program. For a more complete list please refer to your Summary Plan Description.