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Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29558
Experience:  Taxes, Immigration, Labor Relations
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I run a small nonprofit and we are setting up a ...

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I run a small nonprofit and we are setting up a medical Flex Spending Acct. as a benefit for staff. As part of my compensation package, I receive $1500/yr towards dental expenses (in lieu of insurance). However, that is income and I have to pay tax on it. I would like to know if my employer can contribute this money directly to my medical FSA, and what taxes would be avoid by doing so. Is there a limit on such contributions ?
Submitted: 9 years ago.
Category: Tax
Expert:  Lev replied 9 years ago.

Please refer to the IRS publications:

A health FSA may receive contributions from an eligible individual. Employers may also contribute. Contributions are not includible in income. Reimbursements from an FSA that are used to pay qualified medical expenses are not taxed.

For the health FSA to maintain tax-qualified status, employers must comply with certain requirements that apply to cafeteria plans. For example, there are restrictions for plans that cover highly compensated employees and key employees. The plans must also comply with rules applicable to other accident and health plans.

There is no limit on the amount of money you or your employer can contribute to the accounts; however, the plan must prescribe either a maximum dollar amount or maximum percentage of compensation that can be contributed to your health FSA.

If your plan favors key employees, you must include in their wages the value of taxable benefits they could have selected. A plan favors key employees if more than 25% of the total of the nontaxable benefits you provide for all employees under the plan go to key employees. However, a plan you maintain under a collective bargaining agreement does not favor key employees.

A key employee during 2007 is generally an employee who is either of the following.
-An officer having annual pay of more than $145,000.
-An employee who for 2007 was either of the following.
---A 5% owner of your business.
---A 1% owner of your business whose annual pay was more than $150,000.

Customer: replied 9 years ago.
Reply to LEV's Post: Thank you. On the employer side, is this money subject to any witholding or taxes ? Is there a certain way it gets codified on the W-2?
Expert:  Lev replied 9 years ago.

Contributions to FSA - employee and employer parts - are not included in income and are not a subject for employment taxes.

On W2 such contributionmay be repored in the box 14 for information only. There is no any special code -

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