Tax Angles Also Specified

In its guidance, OPM said that FSAs will affect employment taxes “identical to premium conversion.” FSA deductions will be excluded from wages before federal income taxes are applied, and are excluded from wages before most state and local income taxes are applied, OPM said. However, it noted that each state and local government decides whether to allow pre-tax treatment for deductions under FSAs and that it is aware of several exceptions: Pennsylvania does not allow for the deduction of taxable income for a dependent care FSA, while New Jersey and Puerto Rico do not allow the deduction of taxable income for either dependent care or a medical care FSAs. FSA deductions are excluded from wages before Social Security (FICA) taxes are applied.