Thursday, August 26, 2010

Preparing for the Government’s Impact on Flexible Spending Accounts

Many churches and charities provide flexible spending accounts (FSAs). Using an FSA is often good stewardship. The new health care reform law requires certain changes to FSAs:
  • In 2011, employees will no longer be able to receive pre-tax reimbursements from their FSA for non-prescribed over-the-counter medications. Thus, the cost of over-the-counter medicine (other than insulin or doctor prescribed medicine) cannot be reimbursed on a tax-free basis through an FSA. FSA plans should be modified to exclude these reimbursements.
  • In 2013, employee contributions to FSAs will be capped at $2,500 annually, with the cap adjusted annually to the Consumer Price Index. FSA plans should be modified in accordance with the new cap, plus annual adjustments.
Planning opportunity: Most charities do not have a properly established plan to reimburse out-of-pocket medical expenses. Even though FSAs will be capped at $2,500 annually in 2013, the benefit of offering an FSA to all staff members on a salary reduction basis is significant. For example, a staff member with marginal (the tax rate on his or her last dollars of income) state and federal tax rates, including social security, of 40% could save $1,000 if they have $2,500 of out-of-pocket medical expenses that are covered by an FSA.

Like someone once said: “You save $1,000 here and another $1,000 there and after a while you are talking about some real money.”