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The Internal Revenue Service is reminding eligible employees that now is the time to begin planning to take full advantage of their employer’s health flexible spending arrangement for next year.

If you don’t offer a flexible spending account (FSA) for your employees, you should consider starting one as they allow them to use tax-free dollars to pay medical expenses not covered by their health plan, including deductibles, copays and any pharmaceuticals.

Now that the year is winding down, even if your employees were using an FSA this year, they must decide again how much they want to set aside pre-tax from their pay checks for medical-related expenses next year.

Participating employees can contribute up to $2,650 during the 2018 plan year. That’s a $50 increase over 2017. 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.

Some of the qualified medical expenses that are not covered by health insurance and for which employees can pay using FSA funds are:

 

  • Copays
  • Deductibles
  • Dental and vision care services
  • Eyeglasses and hearing aids
  • Other medical devices

 

Use it or lose it

The one key factor to remember with an FSA is that under the law, enrollees must use up the funds they set aside during the year or forfeit the remainder.

Fortunately, there’s a special rule that was ushered in by the Affordable Care Act that allows employers to offer participating employees more time through either the carryover option or the grace period option:

Carryover option – An employee can carry over up to $500 of unused funds to the following plan year, meaning that any amount up to $500 left in the account at the end of 2017 can be carried over into 2018 and be used in 2019.

Grace period option – An employee has until two and a half months after the end of the plan year to incur eligible expenses – typically March 15, 2018, for a plan year ending on Dec. 31, 2017.

 

Employers can offer either option – but not both – or none at all.