University of Southern California

USC Benefits

Flexible spending accounts

Flexible spending accounts (FSAs) save you money because they allow you to set aside part of your paycheck for either medical expenses or dependent care—reducing your taxable income. Made possible by Section 125 of the Internal Revenue Code and subject to IRS regulations, and offered at USC through WageWorks, FSAs can protect up to $7,500 a year per employee from any federal, state, or Social Security tax.

How FSAs work

  • You choose an amount (up to $2,500 a year for health care expenses and/or up to $5,000 a year in dependent care expenses
  • Calculate expenses carefully—any unused amounts remaining in your FSA will be forfeited, and balances cannot be transferred between FSAs or carried over to the next year
  • The amount you select is then 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)
  • Enroll for your FSA within 30 days of hire date, and every year thereafter during open enrollment (you must re-enroll each year), or when you have a life event status change
  • 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
  • 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

    Health care expenses must be incurred on your behalf, for your spouse, or for an eligible dependent as defined by the IRS:

  • Medical and dental plan deductibles
  • Copayments
  • Prescriptions
  • Some over-the-counter medicines if prescribed
  • Other health care expenses not covered by your insurance (most expenses that the IRS considered tax deductible are eligible, but not all

Expenses that are NOT eligible

  • Medical and dental insurance premiums
  • Expenses associated with cosmetic surgery
  • Expenses incurred for ineligible dependents or others not in your family

When you can use the money

    The full amount you have selected 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 an example to help clarify:

  • You set aside $1,000 for health care in 2011
  • But you only spend $800—so you have $200 left over at the end of the year
  • During open enrollment at the end of 2011, you decide to set aside $1,500 for 2012

So, on January 1, 2012, you now have $1,700 in your health care FSA ($200 old, $1,500 new).

Now, let's say you incur a $300 expense during the grace period (somewhere between January 1 and March 15, 2012).

The plan will pay your expense using the leftover $200 first—and then access $100 from the newer 2012 balance, leaving you with $1,400 for the remainder of the year (which you have until March 15, 2013 to use).

But what if you didn't incur any expense during the grace period?

Then the unused $200 would be forfeited (you lose it) after March 15, 2012—at which point you would simply have the newer amount of $1,500 available.

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—for more information see Leaving USC.

Options to access the money

  • Use WageWorks' online "Pay My Provider" system
  • Use the WageWorks debit card (keep your receipts)
  • Pay with personal funds and provide receipts for traditional claims reimbursement

See the Wageworks website for more information.

Dependent care FSAs

If you pay for dependent care so you can work, a dependent care FSA may save you money.

Eligible dependents

  • Children under age 13
  • Dependent (child, spouse, parent, grandparent, brother, sister, etc.) who is unable to care for him/herself because of a disability and spends at least 8 hours a day in your home

Eligible expenses

  • Daycare
  • Babysitters
  • Companions
  • Before/after school care

Expenses that are NOT eligible

  • Educational programs
  • Sleepover camps
  • Transportation

Other eligibility information

If you are married, both spouses must work in order to qualify, 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 1 dependent and up to $400 a month for 2 or more dependents.

Please note: Each year FSA plans must pass a non-discrimination test to show they do not favor highly compensated employees regarding eligibility, contributions and benefits. If USC's plans do not pass the test, USC may reduce your election(s) during the year if you are a highly compensated employee as defined by the Internal Revenue Code. Benefits will notify you if it becomes necessary to reduce your contributions.

When you can use the money

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

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.

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.

In this section

Effect of FSAs on other benefits and Social Security

Because the amount you set aside in your FSA is not taxed for Social Security purposes, your future benefit from Social Security may be reduced slightly. However, USC benefits based on your regular annual pay, such as life insurance and retirement plan contributions, will not be affected.