Flexible Spending Accounts

A Flexible Spending Account (FSA), also called a flex plan or reimbursement account, is an employer-sponsored benefit that allows you to pay for eligible child-care expenses on a pre-tax basis. This means that the contributions you make to a Flexible Spending Account are deducted from your pay BEFORE your Federal, State, or Social Security Taxes are calculated and are never reported to the IRS. The end result is that you decrease your taxable income and increase your spendable income. You can save hundreds or even thousands of dollars a year!

The dependent care FSA is federally capped at $5,000 per year. While married spouses can each elect to have this amount deducted from their paycheck and applied to expenses, at tax time all withdrawals in excess of $5,000 are taxed. Unmarried couples can each deduct and use $5,000. However, these expenses are subject to the "qualifying child" rules, which usually means unmarried couples cannot pay expenses for the same child. Unlike medical FSAs, dependent care FSAs are not "pre-funded"; employees cannot receive reimbursement for the full amount of the annual contribution on day one. Employees can only be reimbursed up to the amount they have had deducted during that plan year. If married, both spouses must earn income in order for the Dependent Care FSA to work. The only exception is if the non-earning spouse is disabled or a student. If one spouse earns less than $5,000 then the benefit is limited to whatever that spouse earned.

Contact your company's human resources department for more information on the Flexible Spending Account options available to you.

Before you make the decision to contribute to an FSA, you must determine if that is more of a benefit to your personal financial situation versus the dependent care deduction when you file your taxes. The following sites* will give you more information on the variables in this decision:

http://www.kiplinger.com/columns/ask/archive/2009/q0924.htm

http://www.smartmoney.com/personal-finance/taxes/cut-your-child-care-costs-14246/

IRS Fequently Asked Questions

*Content contained in linked sites is not to be construed as financial advice given by Foundations for the Future. Consult your financial planner for advice specific to your situation.