Flexible Spending Accounts (FSA)

Employer sponsored Flexible Spending Accounts (FSAs) allow employees to set aside a portion of their earnings on a pre-tax basis to pay for qualified medical and/or dependent care expenses.

Health Flexible Spending Account

The most common type of FSA is used to pay for medical expenses not covered by insurance; this usually means deductibles, copayments, and coinsurance for the employee's health plan, but may also include other expenses not covered by the health plan such as dental and vision expenses.

A Health FSA cannot pay for health insurance premiums, cosmetic items, cosmetic surgery, controlled substances, or items that improve "general health". All items must be intended to treat or prevent a specific medical condition; this can be as significant as diabetes or pregnancy, or as trivial as skin cuts. Generally, allowable items are the same as those allowable for the medical tax deduction, as outlined in IRS publication 502.

The Health FSA is federally capped at $2,650 per year. The employee’s annual election for the Health FSA is available for the employee and his/her family or eligible dependents at any time within the plan year after the employee has enrolled and become an active participant in the Plan. This is known as the Uniform Coverage Rule.

Limited Purpose FSA (LPF)

The Limited Purpose Health Flexible Spending Account (LPF) allows employees the additional benefit of qualifying to participate in a tax advantaged flexible spending account while also being able to fund their individual Health Savings Account (HSA).

When an employer introduces a high deductible Health Plan (HDHP) with a Health Savings Account (HSA), they are providing their employees a vehicle to accumulate funds on a tax favored basis, in an individual Health Savings Account, these savings can then be used to pay for qualifying medical expenses. Funds deposited in an HSA are not subject to the use-or-lose rule which could cause forfeitures at the end of a plan year.

The one restriction on making tax advantaged contributions to an HSA is that the employee cannot have any other “first dollar” medical coverage available (other than coverage for vision and dental expenses), because such coverage could be used to cover the minimum out-of-pocket deductible expenses stipulated by the IRS (see chart below). Funds in a general purpose FSA are counted as “first dollar” coverage and therefore, an employee who is enrolled (or whose spouse is enrolled) in a general purpose FSA would be precluded from making contributions to their HSA during the period they have active coverage in a general purpose FSA. This is where the LPF comes into play. The LPF is designed to be compatible with the employee’s Health Saving’s Account. Because the LPF limits reimbursements to vision and dental expenses, employees can maximize the benefits in their HSA by allowing funds to accumulate towards deductible expenses, while using separate pre-tax dollars in their LPF to pay for their out-of-pocket vision and dental expenses.

If an employer allows it under their LPF plan design, employees who anticipate having large deductible expenses can use their LPF as a “Post Deductible FSA” once they have met the minimum outof-pocket deductible expense as required by the IRS (see your organization’s benefits administrator for details). This means that employees can be reimbursed for any general purpose medical expenses that were incurred after the date that the employee met the minimum out-of-pocket deductible expense required by the IRS.

Dependent Care Account (DCA)
FSAs can also be established to pay for certain expenses to care for dependents that live with you while you are at work. While this most commonly means child care for dependent children up to age 13, it can also be used for adult day care for senior citizen dependents that live with you, such as parents. It cannot be used for summer camps (other than "day camps") or for long term care for parents that live elsewhere (such as in a nursing home).

The maximum exclusion under a DCAP for married individuals filing a joint return (or for an unmarried parent) is $5,000. Married individuals filing separately are subject to a lower exclusion ($2,500). 4 However, the $5,000/$2,500 limit is further reduced to the lesser of the participant's earned income or the spouse's earned income. 

Unlike medical FSAs, dependent care FSAs have no Uniform Coverage provision; employees can only receive reimbursement as funds are deposited into the FSA. IRS requirements generally require employees to pay their child care expenses by other means, and be reimbursed via direct deposit or check from Dependent Care FSA funds each pay period, though employees can also use a Flex Debit Card to pay a child care provider if they accept debit or credit card payments.

If married, BOTH spouses must earn income in order to participate in a Dependent Care FSA. The only exception is if the non-earning spouse is disabled or a student. If one spouse earns less than $5,000 then the benefit is limited to whatever that spouse earned. Both spouses must be working at the time the care is provided in order for the expenses to be eligible.

The Importance of Planning
Employee pre-tax contributions are made in equal installments over each pay period. Funds not utilized during the Plan Year will be forfeited. This is commonly known as the "use it or lose it" rule. Terminated employees may elect COBRA to access funds remaining in their account(s). Participation in one type of FSA does not affect participation in another type of FSA but funds cannot be transferred from one FSA to another. Also, the annual FSA contribution amount is an annual binding election. As such the election must remain the same throughout the year unless certain qualifying “change of family status” events occur, such as a change in marital status or in the number of the participants eligible dependents.

Integration of the Flex Debit Card
American Benefits Group offers all clients the ABG Benefits Card that allows employees to pay for eligible expenses at the point-of service with no out of pocket cost and eliminating the need to submit claim forms. Participants use the card to pay for eligible expenses at valid locations and sophisticated IIAS (Inventory Information Approval System) technology separates eligible and ineligible items at point-of-sale and provides for automatic debit-card substantiation. The card is linked directly to the participant’s individual account, and participants have 24/7 access to view their account balance, claims status and account activity through our secure web portal.