Flexible Spending Accounts

Since 2003, federal and postal service employees have had the opportunity to voluntarily participate in the flexible spending account (FSA) program offered by the federal government, the program known as “FSAFEDS.” FSAFEDS allows employees to own two types of FSAs, namely: (1) A health care FSA known as the HCFSA; and (2) a dependent care FSA known as the DCFSA.

Unfortunately, many employees through the years have not participated in the FSAFEDS program as they probably should. This is due in part to a lack of awareness of the program and perhaps a lack of understanding of how an FSA works.

Employees should note that FSAs have been available for many years to employees who work in private industry. An FSA is also referred to as a “reimbursement account”; in other words, an account of funds used to reimburse the FSA owner for certain types of expenses. Moreover, if the rules are followed properly, the FSA allows the FSA owner to be reimbursed for qualified medical and dependent care expenses on a tax-free basis.

Many federal and postal service employees have some general questions regarding how FSAFEDS program works. Typical questions include:

• How much of an employee’s salary can be set aside to the HCFSA and to the DCFSA? Is there a minimum and a maximum amount?
• How does an employee save in taxes when participating in an FSA?
• Is there a spending deadline for using up one’s money that was set aside to an FSA? What happens to the FSA money that is not spent or used?
• How does an FSA pay claims? Is there a large amount of paperwork?

Employees may also have some specific questions about the HCFSA, including:

• What types of medical, dental and vision care expenses are reimbursable under a HCFSA?
• What types of medical, dental and vision care expenses are not reimbursable under a HCFSA?
• Why is an HCFSA better for an employee rather than the employee deducting out-of-pocket medical expenses on his or her income tax return?
• Can an employee’s HCFSA be used to reimburse the medical expenses of a dependent who is not included as part of the employee’s health insurance plan?

Employees should be aware that the cost of the 2007 premiums of the health insurance plans included in the Federal Employees Health Benefits Program (FEHBP) will increase on average about 1.3 percent over the cost of their 2006 premiums. Many plans will also be increasing their deductibles and employee co-payment amounts. Some plans may limit how much they will cover as well as not paying for certain medical and dental incurred expenses. An HCFSA is probably their best choice for paying for these increasing out-of-pocket expenses.  

Many employees also have questions concerning the DCFSA. Some typical questions are:

• What type of dependent care expenses are reimbursed under a DCFSA?
• Can the DCFSA be used to pay the adult day care expenses of a parent or an in-law and the expenses incurred for the care of a disabled spouse?
• Is there any advantage to using a DCFSA versus using the child and dependent care tax credit? Can they both be used simultaneously?

Employees should be aware that their out-of-pocket expenses for dependent and medical care are increasing. Participation in the FSAs will certainly help in minimizing the impact of these rising costs. Having the knowledge of how the FSAs work and how much to set aside from their salaries should assist employees in making the best and most affordable choices for themselves and for their families.