Managing U.S. Flexible Spending Accounts

[David T.]

John--

Thanks for working with me on this. First note: you can change the register labels under Edit->Preferences->Accounts where there is a "Use formal labels" checkbox. When I check this and look at my Equity account, I see that my initial transfer to Liabilities:FSA is entered as a debit in Equity and a credit in Liabilities. So that seems right.

However, the transfer from Income:Wages shows as a Debit in both accounts. It works out in the Income account, but has the reverse effect in the Equity account.

I haven't even gotten to the actual transactions beyond the payroll deductions. I'll troll those depths once I get this part working right.

David

--- On Sun, 1/11/09, 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: Sunday, January 11, 2009, 4:57 PM
> Sounds like you're not using debit/credit correctly.
> 
> What irks me about gnucash is that with a bank register
> instead of seeing headers like "Deposit" and
> "Withdraw" there is "Debit" and
> "Credit". This can be confusing for us
> non-accountants because we think of 'debit' as
> subtracting and 'credit' as adding.
> 
> Now the reason you debit the Equity:FSA account at the
> beginning of the year is because as you debit your payroll
> account you do the opposite (credit) in the Equity:FSA
> account. And the initial debit in the Liability:FSA account
> balances the initial credit in the Equity:FSA account.
> 
> So, did you 'debit' the Equity:FSA accounts with an
> original amount for the beginning balance and do you
> 'credit' these accounts each time you
> 'debit' from your paycheck?
> 
> And initially when you 'debit' the Equity:FSA
> accounts, did you 'credit' the Liability:FSA
> accounts?
> 
> Lastly, when you spend (credit) out of the Liability:FSA
> accounts, you transfer (debit) that amount to your checking
> account to cover the money that you actually spent from the
> checking account.
> 
> Remember, a debit increases and a credit decreases - except
> for income and expense in which case the balances are
> normally reversed (in preferences) because as you spend
> (expense) you want to see that balance in the red, and as
> you earn (income) you want to see that balance in the black.
> And of course you have the option in preferences to set it
> up any which way you want. Tinker, explore, and discover.
> 
> On Jan 11, 2009, at 4:18 PM, David T. wrote:
> 
> > John--
> > 
> > I am trying to implement this method using your
> guidelines. I have run into a problem. I have the following
> so far:
> > 
> > I created Equity:FSA:Health and Equity:FSA:Dependent.
> > I created a transaction that decreased each by $5000
> on 1/1/08.
> 
> And did you debit (increase) the Equity:FSA accounts?
> And at the same time, did you credit (decrease) the
> Liability:FSA accounts?
> 
> > I changed all my paycheck deductions to transfer money
> into each Equity account.
> 
> Do you debit (decrease) the income account and credit
> (decrease) the Equity account? Now if that doesn't
> confuse you, nothing will. But this jargon is based on the
> assumption that your income and expense account balances are
> reversed.
> 
> > Instead of zeroing out these accounts, the paycheck
> amounts are decreasing the Equity amount. So instead of zero
> (or close to it), I am looking at ($10,000). What have I got
> wrong?
> > 
> > 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.
> >> 
> 
> John Carter
> Disclaimer: I am not a gnucash developer. My comments are
> based on my personal experience with gnucash.