Managing U.S. Flexible Spending Accounts

[David T.]

Aha! Thank you for these clarifications! I will have to fix this in my records. I will probably not worry about the sub-accounts under the liability account, since the FSA doesn't make any distinctions on the types of medical expenditures it pays on. If I do it this way, I assume that the need for the two transactions you describe goes away--right?

I agree that these FSA accounts are hell, but we definitely have no problem expending the FSA dollars, so it is worth it from that perspective.

Again, thanks for your clarifications.

David

--- On Mon, 1/5/09, John R. Carter, Sr. <john at jrcarter.com> wrote:

> From: John R. Carter, Sr. <john at jrcarter.com>
> Subject: Re: Managing U.S. Flexible Spending Accounts
> To: sunfish62 at yahoo.com
> Cc: "gnucash" <gnucash-user at gnucash.org>
> Date: Monday, January 5, 2009, 5:04 PM
> An FSA should be set up as a Liability account, not an Asset
> account. Treat it just like a credit card. It's money
> you can spend, like credit, but only on health expenses, and
> you need to keep your medical bills as proof of expense and
> payment if ever audited.
> 
> It doesn't matter whether you spend the money at the
> beginning of the year and are "reimbursed" (so to
> speak) throughout the year or you spend the money at the end
> of the year for what has "accrued" (so to speak)
> throughout the year. The reality is that you are credited at
> the beginning of the year for possibly making that expense
> on health issues throughout the year and the amount not
> taxed in your income is spread out over the year. But that
> "credit" has to be accounted for as a Liability.
> 
> None of the health expenses you spend against the FSA
> should be allocated to any taxable health expense. When you
> exceed the FSA amount, then those excess amounts are taxable
> and should be allocated to Healthcare.
> 
> Example accounts:
> 
> Expenses
> . Healthcare
> . . Physician (taxable)
> . . Dentist (taxable)
> . . Unused FSA (non-taxable)
> Liabilities
> . FSA (non-taxable)
> . . . Physician - FSA (non-taxable)
> . . . Dentist - FSA (non-taxable)
> Equity
> . FSA - Equity (non-taxable)
> 
> Notes:
> . I don't want to use Equity:Opening Balances as that
> would only confuse things.
> . The only need for subaccounts in Expenses:FSA is to allow
> you to track how much you spend on each category.
> . The way the accounts are named keeps them well identified
> by the register tabs.
> 
> At the beginning of the year, the full FSA amount is
> debited to Equity:FSA (it has to come from somewhere) and
> credited to Liabilities:FSA. At each payday, a deduction
> (debit) from Gross Pay for the FSA is credited to
> Equity:FSA. So at the end of the year Equity:FSA should
> again be zero. If it doesn't, the payroll deductions
> weren't right or the amount allocated was wrong.
> 
> When you incur an expense, you will need to do a multiple
> transaction. Let's say you pay from cash.
> 
> debit Liabilities:FSA:Physician - FSA $25.00
> credit Assets:Current:Cash $25.00
> debit Liabilities:FSA $25.00
> credit Liabilities:FSA:Physician - FSA $25.00
> 
> You need that extra transaction to update the balance in
> Liabilities:FSA. Otherwise, it will always be the initial
> amount. The possibly confusing aspect of this is that
> Liabilities:FSA:<category> will show two entries that
> cancel each other. This is as it should be. By IRS rules,
> you never had that income to spend it, so how could you show
> an expense?
> 
> If you drop below $0.00 in Liabilities:FSA (you need to
> check for this at each transaction), the excess amount
> should then be debited to
> Expenses:Healthcare:<category>.
> 
> Example:
> 
> Balance in Liabilities:FSA is $400.00 and cash payment is
> $500.00:
> 
> debit Liabilities:FSA:Physician $100.00
> debit Expenses:Healthcare:Physician $300.00
> credit Assets:Current:Cash $500.00
> 
> At the end of the year, any amount left over in
> Liabilities:FSA must be transferred to
> Expenses:Healthcare:Unused FSA (non-taxable) and this will
> zero out the Liabilities:FSA account at the end of the year.
> 
> Complicated? Yes. Accurate? Yes. That's the nature of
> double-entry accounting.
> 
> If you want my advice, don't take out an FSA. You may
> never get to spend it all and what you don't spend will
> be income thrown away.
> 
> 
> On Jan 5, 2009, at 11:30 AM, David T. wrote:
> 
> > I thought I would share my insights with the list on
> handling Flexible Spending Accounts. Most of this will be
> obvious for accountants, but for me it was not, and I share
> in hopes it helps someone else!
> > 
> > Flexible Spending Accounts are a U.S. tax option that
> allow individuals to separate up to $5000 annually from
> their pre-tax income and use that money to pay off Health or
> Dependent care costs. The money is usually deducted directly
> from your paycheck and is deposited in an FSA account. You
> save by paying for services with pre-tax dollars.
> > 
> > However, the accounts are set up so that if you
> don't use the money before the end of the tax year (plus
> a grace period), the money goes to the administrator of the
> account (Use it or lose it). So it is important to track how
> much you have spent so far of your FSA dollars and be sure
> to get it all.
> > 
> > I had set up my FSA accounts as Asset accounts, but
> always had trouble tracking how much I had left in the
> accounts, since the grace period meant that some
> transactions in the current year were actually for the
> previous year. The solution I have found is to break these
> accounts into subaccounts by year, which will allow me to
> see clearly how much remains in each year. The payroll
> deductions now go into the year for which they apply, as do
> the expenses. If all goes correctly, there will be a zero
> balance in the year's account at the end.
> > 
> > Like I said, an accountant probably knows this stuff
> cold, but for this average user, it was a revelation that I
> think will simplify these accounts for me.
> > 
> > David
> > 
> 
> 
> John Carter