Flexible Spending Accounts
Choose Your 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.
Follow the link to find current IRS annual contribution limits. 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 Savings 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 out-of-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 participant's 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.
A Cafeteria Plan (authorized under IRS Code-125) is a written benefit plan maintained by a company for the benefit of its employees. These plans are often referred to as Flex Plans, FSA Plans or Flexible Spending Accounts.
As a participant, you can pay your portion of certain nontaxable benefits (i.e. health and/or dental insurance premiums) with before-tax dollars by salary reduction rather than with after-tax dollars through payroll deduction. In other words, you can have your payment for qualified benefits deducted from your paycheck before your employer calculates your payroll taxes.
You can also pay for certain medical and dependent care expenses with pre-tax dollars by setting aside additional funds through salary reduction thereby further reducing your taxable income and the total amount of taxes you pay.
A Flex Plan can offer the following types of benefits:
- Pre-Tax Premium Contributions for Health and/or Dental Plans offered through your Company
- Medical Expense Reimbursement Account (Health FSA)
- Dependent Care Assistance Plan (DCAP)
The retailer’s point of sale system identifies eligible healthcare FSA/HRA purchases by comparing the inventory control information (e.g., UPC or SKU number) for the items being purchased, against a pre-established list of eligible medical expenses. The list is restricted to “eligible medical expenses” as described in Section 213(d) of the Internal Revenue Code (including eligible non-prescription items). The eligible medical expenses are totaled and sent to the payment card issuer’s system which approves the payment subject to coverage under the health plan (i.e., type of coverage provided, covered participant, etc). The IRS requires an IIAS for card transactions to be accepted at non-healthcare merchants. IIAS transactions are considered fully substantiated.
To view a listing of retail merchants that have implemented an IRS-approved inventory information approval system, please visit the Special Interest Group for IIAS Standards website and click on “IIAS Merchants” under “The Store Locator.”
Only employees may participate in an FSA. Regulations prohibit sole proprietors, partners, members of an LLC (in most cases), or individuals owning more than 2% of an S corporation from participating in the FSA plan. These individuals, however, may still sponsor a plan and benefit from the savings on payroll taxes.
By participating in a Flex Plan, you will not have to pay State or Federal income tax or Social Security on your elections! Uncle Sam does not get a share of the money! Let us look at one employee and see how he saved on taxes by participating in a Flex plan. Here is the employee's situation:
- Salary: $2,500 a month
- Withholding: 28% for federal withholding and 7.65% for Social Security
Before participation in the Flex plan, the employee paid the following:
- Monthly premium for health insurance: $348
- Out-of-pocket medical expenses: Monthly average of $100
- Day Care Expenses: $200 a month
The employee decided to pay for the premiums through the Flex plan, to put $100 a month in a Health FSA and $200 a month into the Dependent Care Expense Plan.
View examples of medical expenses eligible for reimbursement with a Flexible Spending Account.
View examples of accepted over-the-counter items eligible for reimbursement with a Flexible Spending Account.
Fill out IRS Form 2441 to help you determine your best course of action.
Your elections cannot be changed during the Plan Year unless you experience one of the following qualified status change events:
- Change in employee's legal marital status
- Change in the number of dependents
- Change in employment status
- Dependent's satisfying or ceasing to satisfy dependent eligibility requirements
- Entitlement to Medicare or Medicaid
- Judgment, decree, or order
The following status change events permit changes to insurance premium contributions only. Changes to Health FSA Benefit elections are not allowed for these status changes:
- Change in benefit cost, benefit coverage or plan options
- Change in residence
The change in your election must be "consistent" with your change in status. For example, if you or your spouse were to go from part-time to full-time employment, you could increase your Dependent Care election; if you or your spouse were to go from full-time to part-time employment, you could decrease your Dependent Care election.
Your employer may elect to have you enroll online. If so, you will receive an email with the link to the enrollment page and detailed instructions for logging in and making your election(s).
Otherwise, you will receive an enrollment kit with information on the Plan itself and the benefits your employer is offering. Included will be a Flex Plan Election Form, and a Direct Deposit Authorization Form. Complete both forms and return them to your employer by your enrollment deadline.
If you are NOT currently enrolled in the cafeteria plan, it will be assumed that you do not wish to participate.
If you ARE currently enrolled in the cafeteria plan, it will depend on the elections you have previously made.
- If you currently have elected insurance premium benefits, it will be assumed that you want to continue these elections, and your deductions will be continued for the next plan year.
- If you currently have elected a Health FSA or Dependent Care Assistance Plan it will be assumed that you do not want to continue participation in these accounts and your deductions will cease at the beginning of the next plan year.
The maximum election for the Dependent Care Assistance Plan is $5,000 per year per family. Your employer will set the maximum election amount for the Health FSA account.
Claims are processed daily and payments are sent every Tuesday. Claims received on Fridays by 12:00 PM EST will be included in Tuesday's payment process.
Employees have until the end of a run out period, usually 90 days past the end of the plan year, to submit claims incurred during the plan year. Employees who do not claim their elected benefits by the end of the run out period will forfeit any balance(s) in their account(s). Any remaining funds will be retained by the employer. Most employers use this money to offset the administrative costs of the plan. Check with your employer to see how long your runout period is.
Some plans offer a grace period of up to two and one half months to incur claims after the end of the plan year. Check with your employer to see if your company offers a grace period.
Partners, 2% owners of "S" corporations, LLC members and in some cases, their direct family members are not eligible to participate. Employees should check with their employer regarding other eligibility restrictions, such as waiting periods for new hires, minimum hours worked or if there are any restricted classes of employers.