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September, 2005 Tax Tip

Flexible Spending Accounts Are Now Even More Attractive

Sometimes referred to as a cafeteria plan, flex plan, or a Section 125 plan, a Flexible Savings Account (FSA) allows an employee to set aside a certain amount of his paycheck into an account on a pre-tax basis.

During the year, the employee has access to this account for reimbursement of an almost unlimited variety of medical expenses, not covered by insurance, as well as certain other expenses that he regularly pays for.  When he uses tax-free dollars to pay for these expenses, he realizes an increase in his spending power, and substantial tax savings.

Until recently, the one downside in FSA’s was that the employee had to use up the entire account or lose the unspent balance by the end of the plan year, normally December 31st.  A few months ago the IRS decided to allow employers to extend the deadline by up to 2½ months.  Therefore, a company with a plan year ending December 31, 2005 can now extend the deadline to March 15, 2006.  This change should ease the rush at year end to buy glasses and other items, whether needed or not, to avoid losing the balance in one’s account.

 

What prompted the change was the substantial pressure put on the Treasury by certain Senators who felt the need to make FSA’s more attractive.  Many eligible employees haven’t signed up for FSA’s due to concern over losing a portion of their account funds.  This may now change.  Even with this modification, some Senators are advocating even more employee oriented changes, such as allowing up to $500 of unused funds to be carried over for use in the next year.  Stay tuned.



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