An individual can utilize an employer’s cafeteria plan of employee benefits to establish a flexible spending account (FSA). An employee can roll over savings in the account from one year to the next. However, as of 2015, the maximum amount that can be rolled over is $500.
What Is a Flexible Spending Account?
A flexible spending account is an account that an employee establishes through his employer, which offers substantial tax advantages. An employee must designate a certain amount of funds for this account. The money from the employee’s paycheck is then diverted into the FSA. The employee is free to draw on the funds in this account to cover medical care costs and costs related to care for dependents. Expenses not covered by the employee’s insurance policies, such as co-pays and deductibles, can be paid by the FSA. Also, medical and dental expenses that exceed the benefits provided by medical and dental insurance policies can be paid using funds from the FSA.
An FSA offers employees tax advantages, as the money contributed to this account is not subject to payroll tax. As of 2015, an employee must designate at least $100 annually to be diverted to an established FSA. The maximum amount that can be diverted to such an account cannot exceed $2,500 per year.
It is in the employee’s best interest to utilize as much of the funds in the FSA as possible since no more than $500 can be rolled over from one year to the next. Money in excess of that amount is lost entirely. Some employers, however, allow claims against FSAs to be made into the first quarter of the next year, but this practice is not standard, and each employee must determine what policies his employer follows in regard to claims against FSAs.