The IRS recently reminded employees that now is the time to start planning to take full advantage of their employer’s health flexible spending arrangement (“FSA”) in 2016.
FSAs provide employees a way to use tax-free dollars to pay medical expenses not covered by other health plans. But employees need to decide how much to contribute through payroll deductions before the plan year begins.
Employees wishing to contribute during in 2016 must make an election for 2016, even if they elected to contribute in 2015. An employee who chooses to participate can contribute up to $2,550 during the 2016 plan year. Amounts contributed are not subject to federal income tax, Social Security tax or Medicare tax. If the plan allows, the employer may also contribute to an employee’s FSA.
Throughout the year, employees can use the contributed funds to pay qualified medical expenses not covered by their health plan, including co-pays, deductibles and a variety of medical products and services including from dental and vision care, eyeglasses, contact lens and hearing aids. Employees should check with their employer for details on eligible expenses and plan claim procedures.
Federal law contains a “use it or lose it” provision under which amounts contributed to an FSA that are not spent by year end are forfeited. But under a special rule, employers may elect to offer participating employees either a carryover option or a grace period option.
Under the carryover option, an employee can carry over up to $500 of unused funds to the following plan year. For example, an employee with $500 of funds at the end of 2015 would still have those funds available to use in 2016. Under the grace period option, an employee has 2½ months after the end of the plan year to incur eligible expenses. For example, for a plan year ending December 31, 2015, the employee would have until March 15, 2016 to use the balance of his or her 2015 contributions. Employers can offer either option, but not both options.
More information about FSAs can be found in IRS Publication 969 , which is available on the IRS.gov website. Please call Jeff Senney or Matt Stokely with any questions about FSAs or other employee benefits at Jsenney@pselaw.com or 937-223-1130.