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Forfeited FSA Balances — What’s an Employer to do?

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Under an employer-sponsored flexible spending account (FSA) plan, employees can elect to contribute a designated pre-tax amount of their annual salary to their personal healthcare FSA, dependent-care FSA or both.

For a personal healthcare FSA, the maximum amount they can contribute for the 2024 tax year is $3,200 (up from $3,050 in 2023). For a dependent-care FSA, the maximum amount is $5,000. And for a married employee, the $5,000 cap represents the highest amount that both spouses can together contribute.

But what happens to the money that isn’t used?

What you can and can’t do

Because FSAs have a strict “use it or lose it” mandate, employers have several options.

  1. You can simply keep the money
  2. If you don’t keep the money, forfeited amounts must be used to:
  • Defray expenses of administering the FSA
  • Reduce employee FSA salary reduction amounts for the following plan year
  • Add to your employees’ FSA coverage on a reasonable and uniform basis

Forfeited funds may not be returned to individual employees or donated to charity. If an employee terminates when their reimbursements for the year are greater than their contributions to that point, you may not withhold funds from their final paycheck or bill them for the difference.

 Exceptions to the rule

While the leftover balance generally reverts back to the employer, there are some exclusions:

  • An FSA plan can allow a grace period of up to two and a half months
  • A healthcare FSA plan can allow employees to carry over up to $610 of unused balances from one year to the next. (However, if the $610 carryover privilege is allowed, the healthcare FSA cannot also offer the grace-period deal.)
  • Dependent-care FSAs cannot allow the carryover privilege, but they can allow the grace period

FSA forfeitures total at least $3 billion per year. While the best-case scenario is that employees max out their funds for their own expenses, it’s important to understand your options.

 For tax planning guidance for your small business, call Magone & Company today at (973) 301-2300.

 

This document is for informational purposes only and should not be considered tax or financial advice. Be sure to consult with a knowledgeable financial or legal advisor for guidance that is specific to your tax situation.

Making Employee Financial Wellness a Priority Can Pay Off for Your Business

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After a 42-month hiatus, federal student loan payments resumed in October 2023. Impacted employees are now dealing with a new bill factored into their monthly budgets, leaving many stressed and worried.

As employers strive to support their workforce, offering benefits that help employees manage their student loan debt has become increasingly important.

More than just a paycheck

Whether you’re running an organization or working for one, most people would agree that employee financial wellness is a hot topic. A comprehensive benefits package — one that focuses on financial wellness — can help cultivate a happier, more focused and more engaged workforce that’s better prepared for retirement.

The pause on payments afforded borrowers over $260 billion in waived costs. However, the resurgence has added stress to employees’ financial situations, affecting their job performance, overall well-being and ability to make major life decisions. Younger workers, in particular, find themselves torn between repaying student loans and saving for retirement.

According to a recent study by the ADP Research Institute, about half of workers are in the process of leaving their workplace. Among workers with student loan debt, that number increases to nearly 60%.Turnover is costly, and offering the right benefits can encourage workers to stay.

Benefits for employees — and employers

By offering a retirement plan with a student loan matching program, employers can demonstrate their commitment to supporting employees in making sound financial decisions, ultimately enhancing employee retention and satisfaction.

Under the SECURE 2.0 Act, employers are enabled to match student loan payments as contributions to retirement plans, so employees can tackle debt while saving for the future. For every qualified student loan payment made by an employee, the employer may make a matching contribution to their 401(k) plan based on the amount of the loan payment.

The results?

  • Reduced student loan debt
  • A retirement savings increase (even if they’re not making contributions)
  • Compound interest as 401(k) account grows

Plus, employers get a tax benefit for their matching contributions. If certain requirements are met, employers can deduct contributions made to a qualified retirement plan on behalf of its employees. The deduction reduces an employer’s taxable income — while helping more people achieve a secure financial future.

If you have a question about retirement benefits or their tax implications, reach out to the tax experts at Magone & Company.

 

This document is for informational purposes only and should not be considered tax or financial advice. Be sure to consult with a knowledgeable financial or legal advisor for guidance that is specific to your unique circumstances.

How Tax Debt Could Impact Your International Travel Plans

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Gearing up for a summer getaway abroad? Before you head to the airport, be aware of a potential roadblock for delinquent taxpayers — passport problems.

In 2015, the Fixing America’s Surface Transportation Act empowered the IRS to inform the State Department about taxpayers with “seriously delinquent tax debts.” This information can be used to deny passport applications or renewals for individuals who owe a hefty amount to Uncle Sam. As of 2024, the “seriously delinquent” threshold stands at $62,000, including back taxes, interest and penalties.

So how can you help ensure you’re in your seat for takeoff?

Before the gate closes…

Affected taxpayers will receive written notice from the IRS outlining steps to resolve the issue.

Once the tax debt is settled, the IRS will reverse the certification within 30 days. The State Department also allows a 90-day period to make full payments or set up a payment arrangement before denying passport applications.

It’s essential to act promptly if international travel plans are on the horizon. Be sure to:

  • Pay the tax debt in full or set up a payment plan with the IRS to settle the debt in installments
  • Consider an Offer in Compromise (OIC)
  • Comply with a settlement agreement
  • Request a collection due process appeal or relief

An important reminder: The IRS will never call or email in an attempt to settle a tax debt, nor will they require payment via gift cards or other unorthodox means. Verify through official channels or contact your accountant or attorney for assistance to avoid falling victim to fraud schemes.

Departing on time

Whether you’re traveling for business or pleasure, don’t miss your flight due to delinquent taxes. By exploring these relief options and seeking guidance from a trusted tax advisor, you can navigate through challenges with a smoother landing.

Reach out to the tax experts at Magone & Company, or give us a call today at (973) 301-2300 for an evaluation of your tax situation.

 

This document is for informational purposes only and should not be considered tax or financial advice. Be sure to consult with a knowledgeable financial or legal advisor for guidance that is specific to your tax situation.

Before You File, Double Check Those Medical Bills

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According to the IRS, medical expenses include the “costs of diagnosis, cure, mitigations, treatment or prevention” of an injury or disease. And dealing with these costs can be a challenging part of life.

But what many taxpayers may not realize is that there are specific tax laws governing the deduction of certain medical expenses to help you save.

Understanding these regulations is essential to ensure you’re maximizing your tax benefits while staying compliant with the law. Here’s a rundown of the basic rules:

Flexible spending accounts (FSAs). An FSA is a tax-advantaged account offered by some employers to help alleviate qualified health-related expenses like prescriptions or eyeglasses. This type of account has a “use-it-or-lose-it” feature, so any money leftover at the end of the year will be forfeited. Keep that in mind when allocating how much to contribute for the year.

Medical and dental deductions. Medical and dental expenses that aren’t reimbursed by your insurance may be deducted to the extent your annual total exceeds 7.5% of your adjusted gross income.

To qualify for medical deductions, you must also itemize. When adding up your medical costs, be sure to include the cost of traveling to your doctor or medical facility for treatment. If you go by car, you can deduct a flat mileage rate, adjusted by the IRS each year, or you can keep track of your actual out-of-pocket expenses for gas, oil, repairs, parking and tolls.

So what’s eligible?

To make the most of your tax deductions, here’s a quick breakdown of items that you may and may not write off.

Questions about your medical deductions? Reach out to the CPAs at Magone & Company to ensure you’re on track to save.

Eligible Not Eligible
A physician-directed weight-loss program undertaken to treat obesity Meal replacements, diet foods and supplements, or a weight-loss program to maintain appearance
Treatment at a drug or alcohol clinic, a smoking-cessation program or  a prescription for nicotine withdrawal medication A doctor-recommended trip or vacation to rest or boost your mood
Acupuncture Marriage counseling
Dentures, hearing aids and orthopedic shoes Household help
Admission and transportation to a medical conference concerning the chronic illness impacting you or your family member The collection and storage of DNA (unless you can prove how DNA will be used for diagnostic testing)
Childbirth classes for a mother-to-be Maternity clothes
Teeth cleaning and orthodontia Teeth bleaching
A wig that benefits the mental health of patients suffering hair-loss from disease Hair transplants
Contact lenses and peripheral materials Retin-A for wrinkles
Nursing services at home or a care facility Home nursing services for a normal, healthy baby

 

This information is provided for educational purposes and should not be construed as financial or legal advice. Please consult your accountant or attorney for advice specific to your situation.

Employee or Independent Contractor? New Regulations Now in Effect

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As an employer, it’s critical to stay informed about changes in regulations that impact how you classify workers.

The U.S. Department of Labor has updated the rules regarding independent contractor classification. The traditional tests used to classify independent contractors versus employees are no longer valid, requiring a shift in how you approach this distinction when hiring.

For years, many employers have grappled with the blurred line between independent contractors and employees. Misclassifying workers can lead to significant legal and financial consequences for your business.

The DOL released a comprehensive six-part test to assist you in correctly classifying workers as either independent contractors or employees. Here’s a brief overview:

  1. Is the work vital to your business? If the worker’s role impacts the core operations of the business, they’re likely economically dependent on the employer. On the other hand, the work of an independent contractor is usually inessential to the organization.
  2. Does the worker’s managerial skill affect their opportunity for profit or loss? An independent contractor can experience both profit and loss based on their managerial decisions, such as hiring, purchasing and marketing. In contrast, an employee’s ability to earn more money is not tied to their managerial skills.
  3. How does the worker’s relative investment compare to your investment? Independent contractors typically make investments that contribute to the growth and success of the business, while an employee’s investment is usually minimal compared to the employer’s.
  4. Does the work require special skill and initiative? A worker’s business skills and initiative play a role in determining their economic independence. But having specialized skills alone does not automatically classify a worker as an independent contractor.
  5. Is the relationship permanent or indefinite? If the worker’s association is ongoing or indefinite, they’re likely an employee. Independent contractors work on a project basis.
  6. What is the degree of your control as the employer? The level of control exerted by the employer is a key factor in determining the worker’s economic dependence. Independent contractors have more autonomy over their work, while stringent control over a worker’s job schedules and tasks indicates an employer-employee relationship.

Implications for employers

It’s essential to review and update your current practices and contracts to ensure compliance with the updated classification criteria. This includes outlining the scope of work, payment terms and the level of control exerted over the contractor.

By keeping detailed records, you can demonstrate compliance in the event of an audit or legal dispute. The U.S. Department of Labor requires employers to maintain careful documentation for each exempt and independent contractor hired including:

  • Forms signed by independent contractors acknowledging their classification
  • A copy of contract between the employer and the independent contractor
  • Copies of any licenses or registrations held by the independent contractor

Taking a proactive approach

While the new regulations may require adjustments to your current practices, they also present an opportunity to ensure fair treatment of all workers and uphold the integrity of your business.

If you’re looking for guidance regarding your employee classifications or business structure, reach out to our business advisory team– we’re here to help.

Cash vs. Accrual Accounting: Making the Right Choice for Your Business

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Unless you’re a financial professional, navigating your business’s accounting can seem daunting. One key decision you must make as a business owner is choosing between cash and accrual accounting methods.

Each method has its own set of advantages and considerations.

What’s best for your business? Here’s a quick breakdown:

Accrual accounting. Accrual accounting recognizes revenue and expenses when they’re incurred, regardless of when cash actually changes hands. This method provides valuable insights into your business’s financial health and performance, as it reflects all transactions in real-time.

The downside? If your business has limited accounting expertise, accrual accounting may require more time and resources to implement and maintain.

From a tax strategy perspective, accrual accounting can help you track and manage your receivables and payables more effectively, which can be advantageous for tax planning purposes. And because you can match revenues and expenses with greater accuracy, this can lead to more consistent tax liability over time.

Cash accounting. Cash accounting is a straightforward method that records transactions when cash actually changes hands. Revenue is recognized when it’s received and expenses are recorded when they’re paid.

One of the main advantages of cash accounting is its simplicity and ease of use, making it ideal for small businesses with straightforward finances. However, this method may not provide a clear picture of your business’s financial wellness — especially if you have outstanding invoices or bills.

The cash method is often preferred by businesses due to its flexibility in timing income and deductions, allowing for strategic management of taxable income. This can be beneficial for businesses looking to defer income or accelerate deductions. By delaying the receipt of payments or accelerating expenses, you can potentially lower your taxable income for a particular year.

Expanded cash method eligibility

Under the Tax Cuts and Jobs Act (TCJA), eligibility criteria for using the cash method of accounting has been expanded for small businesses. Previously, the gross receipts threshold for small business classification varied depending on factors such as business structure, industry and inventory considerations.

The TCJA simplified this definition by establishing a single gross receipts threshold of $25 million (adjusted for inflation), making small business status accessible to a wider range of companies.

Considering a change?

While a change in accounting methods may result in tax advantages, it may also add additional administrative complexities, especially if financial statements are prepared using the accrual method for reporting purposes. Consulting with a tax professional can help you make an informed decision and develop a tax strategy that aligns with your business’s goals.

The CPAs at Magone & Company can support you in making the most tax-efficient decisions for your business. Give us a call today at (973) 301-2300 to learn more.

 

This document is for informational purposes only and should not be considered tax or financial advice. Be sure to consult with a knowledgeable financial or legal advisor for guidance that is specific to your unique circumstances.