Your flexible reimbursement account allows you to set aside a certain amount of your salary to pay for qualified expenses such as medical and dependent care. You pay for these benefits with pretax money, which gives you income tax savings. Flexible reimbursement accounts are excluded from Social Security tax and therefore may affect your Social Security benefits.
Limits and Impact
As of 2013, if you're married filing a joint income tax return, you can contribute up to $5,000 to your flexible spending account. Otherwise, your yearly limit is $2,500. To get reimbursed for your qualified expenses, you must submit a claim to your employer or the provider, who processes your claim and sends you the reimbursements. Your salary deductions to the account are not subject to Social Security tax if the total does not go over the yearly limit. Not paying Social Security tax on your contributions reduces your taxable wages for Social Security tax purposes. This might ultimately cause a slight decrease in your Social Security benefits when you retire or if you become disabled.
The tax savings you get from your flexible spending account generally offsets the decrease in your Social Security benefits. If you participate in an employer-sponsored pretax retirement plan, you could put an amount equal to your flexible account tax savings into your retirement account. Pretax retirement contributions are not subject to federal income tax, but Social Security tax must come out of your contributions.
Tax Savings Calculation
As of 2013, you and your employer must each pay 6.2 percent of your taxable wages in Social Security tax, up to the yearly wage limit of $113,700. To determine your Social Security tax savings, multiply your annual flexible spending amount by the Social Security tax rate. Let's say you set aside $2,000 a year to your flexible spending account. Multiply $2,000 by 6.2 percent to get $124. The Social Security wages in Box 5 your W-2 would then be reduced by $124. You could simply keep the tax savings. Or you might increase your pretax retirement account by $124 if it does not cause you to exceed the yearly limit for your retirement plan.
The Social Security taxes you and other workers pay are used to fund the Social Security benefits system. Out of every Social Security tax dollar you pay, 85 cents go toward a trust fund that pays monthly benefits to eligible retirees and their dependents and to deceased workers and their beneficiaries. The remaining 15 cents go toward a trust fund that pays benefits to disabled people and their dependents.
The amount of Social Security benefits an employee loses as a result of a flexible spending account varies by employee. This is because benefits are based on how much workers earn during their working career. The Social Security Administration adjusts your wages to include changes that occurred in your average earnings since the year you were first paid. It also figures your average adjusted monthly earnings for the 35 years you earned the most money. Then it uses a specific formula to arrive at your monthly primary insurance amount.
- Saint Paul Public Schools: Frequently Asked Questions About Flexible Spending
- Purdue University: 2013 Dependent Care Flexible Spending Account
- IRS: FAQs for Government Entities Regarding Cafeteria Plans
- University of Maryland: Flexible Spending
- Social Security: Understanding the Benefits
- Social Security: Your Retirement Benefit: How It Is Figured