Flexible Spending Account (FSA) and Dependent Care Reimbursement Account (DCRA)

A flexible spending account (FSA) is a tax-advantaged account that businesses can set up for their employees to pay for qualified medical or dependent-care expenses (DCRA). Employers may contribute to their employees' FSAs and employees may set aside a portion of their earnings for the FSA. The advantage of this low-cost benefit is that it allows employees to pay for qualified expenses on a pre-tax basis and also reduces an employer's payroll tax burden.

The risk involved for the employee is that any money put into the health FSA account each year must be used within that plan year or it will be forfeited (to the company). Conversely, the risk for the employer is that the account funds (whether contributed by the employee over the course of the year or by the employer) must be available in full at any time during the plan year. So if an employee utilized their total annual FSA funds in February but had only contributed a portion of the total, and the employee quit, the employer would be responsible for those funds.

Dependent Care Reimbursement Accounts (DCRA) are a type of FSA that allows employees to put aside a portion of their pay, on a pre-tax basis, to cover eligible dependent care expenses incurred for the care of dependent children, a disabled spouse, elderly parent, or other dependent who is physically or mentally incapable of self-care. Reimbursements from this type of account are limited to the employee's contributions to date. Contributions to both health FSAs and DCRAs are limited by the IRS.

With effective employee education and ongoing communications, flexible spending accounts and dependent care reimbursement accounts can be a great compliment to many benefit packages.

Contact us today to see if an FSA or DCRA plan is right for your business.