University of Southern California

Here's how they work.

You choose an amount (up to $5000 a year for health care expenses and/or up to $5000 a year in dependent care expenses). That amount will be deducted from your paycheck in equal increments over the full 12-month calendar year (except for faculty who opt to receive their base pay over a shorter cycle). Calculate your expenses carefully—any unused amounts remaining in your FSA will be forfeited. Balances cannot be transferred between FSAs or carried over to the next year. Once you have decided on the amount in your FSA, enroll on eTrac within 60 days of hire date, and every year thereafter during open enrollment (you must re-enroll each year), or when you have a change in family status. Note that if you begin an account mid-year due to enrollment as a new hire or a status change, eligible claims must be for services rendered after the effective enrollment date in the FSA. The deadline to claim expenses is always March 31 of the following year (although the last dates to incur expenses vary—see below).

Health Care FSAs

Eligible expenses

The health care account can pay for medical and dental plan deductibles, copayments, prescriptions and certain over-the-counter medicines if prescribed by your physician, and other health care expenses not covered by your medical or dental insurance. Most health care expenses (but not all) that the IRS considers tax deductible are eligible. However, medical and dental insurance premiums are not eligible, nor are expenses associated with cosmetic surgery. Health care expenses must be incurred on your behalf, for your spouse, or for an eligible dependent as defined by the IRS.

When you can use the money

The full amount that you have chosen is available for qualifying expenses from January 1 of the calendar year through March 15 of the following year (the first part of the following year is a grace period), so instead of 12 months you actually have 14½ months in which to spend the funds.

This can be a little confusing as the two plan years will overlap. Let's look at some examples to help clarify. Say you set aside $1000 for health care in 2011, but you only spend $800—so you have $200 left over at the end of the year. Let's also say that you had decided, during open enrollment 2011, to set aside $1500 for 2012.

So, on January 1, 2012, you now have $1700 in your health care FSA ($200 old, $1500 new). Now let's say you incur a $300 expense during the grace period (before March 15, 2012). The plan will pay your expense using the leftover $200 first, and then access $100 from the 2012 balance, leaving you with $1400 for the remainder of the year (which you have until March 15, 2013 to access).

But what if you didn't incur any expense during the grace period? Then the unused $200 would be forfeited after March 15, 2012—at that point you would simply have the new amount of $1500 available.

How to access the money

You may access your health care FSA funds through WageWorks' easy "Pay My Provider" system (no paperwork!) as long as the expense is more than $20. Or you may use the WageWorks debit card you will be provided that is linked to your funds (keep your receipts). Traditional claims reimbursement is also available where you pay with your personal funds and then provide receipts for reimbursement from your FSA. Information on all these methods is best reviewed at the Wageworks website.

Although you can access all funds at the beginning of the year, if you leave USC employment any services provided after your termination date will not qualify, even if you have funds remaining in your FSA (unless you elect COBRA continuation coverage on an after-tax basis—more on that here.)

Dependent Care FSAs

If you pay for dependent care so you can work, you qualify to open a dependent care FSA. Eligible expenses include costs for daycare, babysitters, companions, and before and/or after school care. However, expenses for educational programs, transportation and sleepover camps are not eligible. The dependent in question must be a child under age 13, or a dependent (child, spouse, parent, grandparent, brother, sister, etc.) who is unable to care for him/herself because of a disability and spends at least eight hours a day in your home.

If you are married, both spouses must work in order to qualify for a dependent care FSA, and the amount set aside cannot exceed your earned income or your spouse's earned income, whichever is less. You also qualify if your spouse is a full-time student, or physically or mentally disabled—under these circumstances, you generally may set aside up to $200 a month for one dependent and up to $400 a month for two or more dependents.

Dependent care expenses are reimbursed up to the current balance in your account; money is not paid in advance. However, if you leave USC employment, dependent care expenses incurred in the previous year can be submitted following your termination date subject to the filing requirements listed below.

Dependent care services must be rendered by December 31 of the calendar year in order to qualify—there is no grace period as with the health care FSAs.

The IRS requires you to provide a receipt that includes the name, address, and taxpayer identification number of the person or organization providing your daycare services. Be aware that your W-2 tax form will reflect the amount set aside in your dependent care FSA. Also, the money you set aside in a dependent care FSA will reduce—dollar for dollar—the maximum amount of expense you can apply toward the federal dependent care credit on your income tax return. Consult your tax advisor.