Dependent Care Accounts

A Cafeteria Plan (authorized under IRS Code-125) is a written benefit plan maintained by a company for the benefit of its employees. These plans are often referred to as Flex Plans, FSA Plans or Flexible Spending Accounts.

As a participant, you can pay your portion of certain nontaxable benefits (i.e. health and/or dental insurance premiums) with before-tax dollars by salary reduction rather than with after-tax dollars through payroll deduction. In other words, you can have your payment for qualified benefits deducted from your paycheck before your employer calculates your payroll taxes.

You can also pay for certain medical and dependent care expenses with pre-tax dollars by setting aside additional funds through salary reduction thereby further reducing your taxable income and the total amount of taxes you pay.

A Flex Plan can offer the following types of benefits:

• Pre-Tax Premium Contributions for Health and/or Dental Plans offered through your Company
• Medical Expense Reimbursement Account (Health FSA)
• Dependent Care Assistance Plan (DCAP)

The retailer’s point of sale system identifies eligible healthcare FSA/HRA purchases by comparing the inventory control information (e.g., UPC or SKU number) for the items being purchased, against a pre-established list of eligible medical expenses. The list is restricted to “eligible medical expenses” as described in Section 213(d) of the Internal Revenue Code (including eligible non-prescription items). The eligible medical expenses are totaled and sent to the payment card issuer’s system which approves the payment subject to coverage under the health plan (i.e., type of coverage provided, covered participant, etc). The IRS requires an IIAS for card transactions to be accepted at non-healthcare merchants. IIAS transactions are considered fully substantiated.

To view a listing of retail merchants that have implemented an IRS-approved inventory information approval system, please visit the Special Interest Group for IIAS Standards website and click on “IIAS Merchants” under “The Store Locator.”

Only employees may participate in an FSA. Regulations prohibit sole proprietors, partners, members of an LLC (in most cases), or individuals owning more than 2% of an S corporation from participating in the FSA plan. These individuals, however, may still sponsor a plan and benefit from the savings on payroll taxes.

By participating in a Flex Plan, you will not have to pay State or Federal income tax or Social Security on your elections! Uncle Sam does not get a share of the money! Let us look at one employee and see how he saved on taxes by participating in a Flex plan. Here is the employee's situation:

• Salary: $2,500 a month
• Withholding: 28% for federal withholding and 7.65% for Social Security

Before participation in the Flex plan, the employee paid the following:

• Monthly premium for health insurance: $348
• Out-of-pocket medical expenses: Monthly average of $100
• Day Care Expenses: $200 a month

The employee decided to pay for the premiums through the Flex plan, to put $100 a month in a Health FSA and $200 a month into the Dependent Care Expense Plan.

View examples of medical expenses eligible for reimbursement with a Flexible Spending Account.

View examples of accepted over-the-counter items eligible for reimbursement with a Flexible Spending Account.

Fill out IRS Form 2441 to help you determine your best course of action.

Your elections cannot be changed during the Plan Year unless you experience one of the following qualified status change events:

• Change in employee's legal marital status
• Change in the number of dependents
• Change in employment status
• Dependent's satisfying or ceasing to satisfy dependent eligibility requirements
• Entitlement to Medicare or Medicaid
• Judgment, decree, or order

The following status change events permit changes to insurance premium contributions only. Changes to Health FSA Benefit elections are not allowed for these status changes:

• Change in benefit cost, benefit coverage or plan options
• Change in residence

The change in your election must be "consistent" with your change in status. For example, if you or your spouse were to go from part-time to full-time employment, you could increase your Dependent Care election; if you or your spouse were to go from full-time to part-time employment, you could decrease your Dependent Care election.

Your employer may elect to have you enroll online. If so, you will receive an email with the link to the enrollment page and detailed instructions for logging in and making your election(s).

Otherwise, you will receive an enrollment kit with information on the Plan itself and the benefits your employer is offering. Included will be a Flex Plan Election Form, and a Direct Deposit Authorization Form. Complete both forms and return them to your employer by your enrollment deadline.

If you are NOT currently enrolled in the cafeteria plan, it will be assumed that you do not wish to participate.

If you ARE currently enrolled in the cafeteria plan, it will depend on the elections you have previously made.

• If you currently have elected insurance premium benefits, it will be assumed that you want to continue these elections, and your deductions will be continued for the next plan year.
• If you currently have elected a Health FSA or Dependent Care Assistance Plan it will be assumed that you do not want to continue participation in these accounts and your deductions will cease at the beginning of the next plan year.

The maximum election for the Dependent Care Assistance Plan is $5,000 per year per family. Your employer will set the maximum election amount for the Health FSA account.

Claims are processed daily and payments are sent every Tuesday. Claims received on Fridays by 12:00 PM EST will be included in Tuesday's payment process.

Employees have until the end of a run out period, usually 90 days past the end of the plan year, to submit claims incurred during the plan year. Employees who do not claim their elected benefits by the end of the run out period will forfeit any balance(s) in their account(s). Any remaining funds will be retained by the employer. Most employers use this money to offset the administrative costs of the plan. Check with your employer to see how long your runout period is.

Some plans offer a grace period of up to two and one half months to incur claims after the end of the plan year. Check with your employer to see if your company offers a grace period.

Partners, 2% owners of "S" corporations, LLC members and in some cases, their direct family members are not eligible to participate. Employees should check with their employer regarding other eligibility restrictions, such as waiting periods for new hires, minimum hours worked or if there are any restricted classes of employers.