Agenda Packets - 1986/03/10 - Laserfiche WebLink

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' MEMO 'ro: Mayor i City Council FROM: Finance Director -Treasurer Braqer DATE: February 25, 1986 �X RE: FLEXIHLE SPENDING ACCOUNTS (FSA) Since 1978 Section 125 of the Internal Revenue Code has allowed employers to sponsor and administer flexible spending accounts fcr their employees. FSA's allow employees to he reimbursed for certain out of pocket expenses with pre-tax rather than after-tax dollars. A FSA is funded by salary reduction on the part of the employee. An employee's Federal and State tax withholdings are calculated after the salary reductions have been made. Thus, an employee's withholdings are calculated on a lower amount than an employee who has not elected to participate in an FSA. There are three hasic types of FSA's allowed. They are: 1. Medical 2. Dependent Care 3. Group Insurance ' A. Group short or lonq term disability insurance B. Group life insurance A medical FSA may be used to cover deductible amounts, co -payments, employee contributions, or any other expense not covered under a medical/dentai/vision plan. Under a Medical Plan an employee would set aside money in even amounts of each pay check on a pre -income tax basis to cover these types of expenses. Whenever an employee would incur .such an expense he/she pays it, then submits a request to the plan administrator for reimbursement out of his/her FSA account. The types of expenses allowed would he any which rnuld he deducted on an emplrryco's Federal tax return. W:th,,ol a FSA .m omp!.ryve wr,uld be permitted to deduct these expenses from their Federal income tax return only if the expenses amounted to more than 5% of their gross income in any one year. A Flpxihle Spending Account allows the employee to have thesv expenses pa:d in full nn .1 pre-tc.rr,me tax basis up to the amount which they contribute to the Flexible Spendinq Account. Another Flexible Spending Account allowed under Section 125 of the Internal Revenue Code is a Dependent Care account. This account allows for reimbursement of Day Care expenses while both spouses are working. This account reimburses an ,mployee for those expenses on a pre-tax basis up to the amount that the emnlovee contributes to the account. The advantage to the ' employee is that payment of dependent care on this basis may present a tax advantage greater than the child rare credit presently allowed on their Federal tax return. The credit allowed on the Federal tax return diminishes as gross income rises.