Divorce and flexible spending accounts

Russell Knight

Russell D. Knight has been practicing family law as a Chicago divorce lawyer since 2006. Russell D. Knight amicably resolves tough cases while remaining a strong advocate for his client’s interests.

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Flexible Spending Accounts And Divorce In Illinois

Divorce and flexible spending accounts

There are a lot of assets to account for in an Illinois divorce. 401ks, houses, cars, bank accounts and personal items must all be allocated to each party in a divorce.

 It is easy to overlook smaller accounts during the flurry of paperwork that encompasses both discovery and drafting of a Marital Settlement Agreement in an Illinois divorce. One of the smallest accounts you or your spouse may have is a flexible spending account (FSA). Flexible spending accounts, while designed to spend, are still assets that should be divided in an Illinois.

What Is A Flexible Spending Account?

A flexible spending account (also known as a flexible spending arrangement) is an account an employer provides as a benefit that allows the employee to deposit pre-tax dollars into and spend those pre-tax dollars on specific items (health care, daycare, or parking)

The advantage of flexible spending account is that the money deducted from the employee’s salary in order to deposit into the flexible spending account is not taxed. Depending on the employee’s income, this could result in savings of up to 37%.

The disadvantage of flexible spending  accounts is that the employee MUST spend the money deposited in the account or it will be forfeited (with many carryovers and exceptions)

Health Flexible Spending Accounts

Most flexible spending accounts are for health care expenses.  Health care expenses are often regular for many people: prescriptions, physical therapy, etc. So, it’s reasonable to expect to have a certain amount of out-of-pocket health care expense each year.

“In the case of an employee who is an eligible individual…amounts contributed by such employee’s employer to any health savings account…such employee shall be treated as employer-provided coverage for medical expenses under an accident or health plan [and thus be non-taxable]” 26 U.S. Code § 106(d)(1)

2021’s current health care spending account maximum is $2800 a year.

Dependent Care Flexible Spending Accounts

Parents can put away $ 2500 each in Flexible Spending Accounts in order to pay for care of the children while they are at work.

“Gross income of an employee does not include amounts paid or incurred by the employer for dependent care assistance provided to such employee” 26 U.S. Code § 129(a)(1)

“The amount [of income] which may be excluded… for dependent care assistance with respect to dependent care services provided during a taxable year shall not exceed $5,000 ($2,500 in the case of a separate return by a married individual). 26 U.S. Code § 129(a)(2)

The child who is getting the care must be “[t]he taxpayer’s dependent…who has not attained age 13” 26 CFR § 1.21-1(b)(1)

Transit or Parking Flexible Spending Accounts

In Chicago, public transportation is abundant and parking is expensive. Some employers provide flexible spending accounts for their employees which make these expenses tax free.

“ Gross income shall not include any fringe benefit which qualifies as a…qualified transportation fringe” 26 U.S. Code § 132(a)(5)

“[A] “qualified transportation fringe” means any of the following provided by an employer to an employee:

(A) Transportation in a commuter highway vehicle if such transportation is in connection with travel between the employee’s residence and place of employment.

(B) Any transit pass.

(C) Qualified parking.

(D) Any qualified bicycle commuting reimbursement.” 26 U.S. Code § 132(f)(1)

As of this writing, the maximum flexible spending account amount for qualified transportation expenses is $ 270 a month.  That’s a possible $3240 in the account for the year.

Dividing Flexible Spending Accounts In An Illinois Divorce

Illinois divorce courts “shall divide the marital property without regard to marital misconduct in just proportions” 750 ILCS 503(d)

“”marital property” means all property… acquired by either spouse subsequent to the marriage” 750 ILCS 503(a) 

Unless you got married after the beginning of the year any money in a flexible spending account will be marital and thus divisible.

The problem is that the money in a flexible spending account must be spent on its intended purpose that year…or it is forfeited (there are lots of carryover rules and exceptions).

So, any request to divide the money would have little effect as the money would still be spent on the parties’ health care or child care expenses.

A better solution might be to request that neither party be responsible for any contribution to those expenses until the flexible spending accounts are exhausted.

Why Flexible Spending Accounts Are Important In An Illinois Divorce

Flexible spending accounts aren’t effectively divisible and they’ll probably expire before the divorce is finalized so why are they important to consider?

Flexible spending accounts may make reduce income tax but they do not reduce income when calculating child support and maintenance (formerly known as alimony). It is important to include the annual flexible spending account amounts as income when calculating child support and/or maintenance.

Flexible spending accounts are important to consider because a divorce litigant who discloses their flexible spending accounts is probably truly disclosing everything they own.

A divorce litigant who either forgets or neglects to include their flexible spending accounts on their financial affidavit or in response to a Notice To Produce probably has other accounts that have not been voluntarily produced.

In the case of failure to disclose this employer benefit the other party is going to be forced to subpoena the employer to get a true picture of their spouse’s assets, income and benefits.

If you’re obsessing about small accounts in your divorce, then you are my kind of person. Contact my Chicago, Illinois family law firm to speak with an experienced Chicago divorce attorney.