I like flexible spending accounts (FSA's) because employees can use pretax dollars to pay for medical expenses and dependent care costs. In addition it allows employers to have lower taxable wages which reduces payroll taxes.
Obama Care put a cap on contributions starting next year which will take away some of the advantages, but Congress is eyeing a bunch of easings that would help workers who participate in flex plans.
Currently, there is no ceiling on contributions to health FSAs, although many firms impose one in the neighborhood of $5,000. Per Obama Care, a $2,500 cap will apply for plan years starting in 2013. The IRS says if an FSA has a July 1-June 30 fiscal year, the $2,500 maximum takes effect July 1, 2013.
Payins to flexible spending accounts for dependent care are not affected by this change Contributions to those plans will remain subject to a $5,000 max.
The days of the use-it-or-lose-it rule are numbered. Under this IRS rule, any employee set-asides that aren’t used by the end of the plan year or grace period must be forfeited. IRS wanted to prevent FSAs from being used to defer compensation, but it now realizes that the $2,500 annual maximum lessens the potential for abuse.
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