Is a Flexible Spending Account (FSA) right for your organization? With the many consumer-driven and tax-advantaged health plan options available, it can be confusing to keep them all straight. Our educational materials explain flexible spending accounts and how they differ from Health Saving Accounts (HSAs) and Health Reimbursement Accounts (HRAs).
Is your FSA plan legally compliant? Any tax advantage is going to come with strings attached. We can help you stay compliant with all of the regulations governing FSAs, including timely coverage of new and changing federal legislation and IRS guidelines.
Do your employees understand the advantages of their FSAs? The key to successful implementation of an FSA is communication. Our customized flyers, emails and presentations will help you promote awareness of the FSA option, and explain its benefits and how to use it.
FSA Video Content .......................................................................................................... 10
Flexible Spending Accounts (FSA) What is an FSA?
A flexible spending account is an account in an employee’s name that can reimburse the
employee for qualified health care or dependent care expenses. It allows an employee to
fund qualified expenses with pretax dollars deducted from the employee’s paychecks. The
employee can receive cash reimbursement up to the total value of the account for
covered expenses incurred during the benefit plan year and any applicable grace period.
“Use it or lose it”
As required by the Internal Revenue Service (IRS), an FSA has a “use it or lose it”
provision stating that any unused funds at the end of the plan year (plus any applicable
grace period) will be forfeited. When electing an FSA during open enrollment, the
employee must specify how much he or she would like to contribute to the FSA for the
year. The goal is choosing an amount that will cover medical or dependent care
expenses, but that is not so high that the money will be forfeited and wasted.
The IRS allows employers to offer an extended deadline, or grace period, of two and a
half months after the end of a plan year to use FSA funds. Thus, for a plan year ending
Dec. 31, the employees would have until March 15 to spend the funds in their FSA. This
provision is strictly optional; the employer must choose to implement it.
Types of accounts
There are two different types of FSAs: health care accounts and dependent care
accounts. One employee can elect to have both types of accounts and contribute
separate pretax dollar amounts to each. These accounts are kept completely separate;
for instance, an employee could not be reimbursed for dependent care expenses from the
health care account.
Health care accounts
A health care FSA can reimburse employees for eligible medical expenses, up to the
amount contributed for the plan year. Beginning in 2013, a health care FSA offered
through a cafeteria plan must limit the amount of salary reduction contributions that
employees can make. Effective for plan years beginning after Dec. 31, 2012,
employee contributions to a health care FSA are capped at $2,500 per year. The IRS
has clarified that the $2,500 FSA limit does NOT apply for plan years that begin before
2013. Also, the $2,500 limit will increase in future years to reflect cost-of-living
increases.
The health care reform law revised the definition of “qualified medical expenses” for
purposes of reimbursement from health care FSAs. Under the new definition, qualified
medical expenses include amounts paid for medicines or drugs only if the medicine or
This is a sample document provided by Group Health Solutions Inc.- SDL Brokerage Inc. 3
A health FSA is an employer-sponsored account that employees can use to pay for or reimburse their qualifying medical expenses on a tax-free basis. Unlike a health savings account (HSA), employees do not need to be covered by a high-deductible health plan to participate in a health FSA. Health FSAs can be offered with any other type of health plan.
Both employers and employees can make health FSA contributions. This is different than a health reimbursement arrangement (HRA), where only the employer is allowed to make contributions. Employees may contribute pre-tax dollars to their health FSAs through a Section 125 plan (or cafeteria plan). Employers do not pay FICA or unemployment taxes on employees’ health FSA contributions.
Often, employers will set a limit on the maximum annual amount that employees may contribute to their health FSAs. Effective for plan years beginning on or after Jan. 1, 2013, the federal health care reform law limits employees’ pre-tax health FSA contributions to $2,500 each year.
Employees may use their health FSAs to pay for or reimburse their own eligible medical expenses, as well as their spouses’ and dependents’ eligible medical expenses. Eligible medical expenses are unreimbursed medical care expenses, as defined under Section 213(d) of the Internal Revenue Code. An employer can more narrowly define the expenses that can be reimbursed from his or her health FSA. Unlike HSAs, health FSAs cannot be used to pay for non-medical expenses.
Also, effective in 2011 as part of the health care reform law, over-the-counter medicine or drug expenses (except insulin) cannot be reimbursed from a health FSA unless prescribed.
There are two unique rules that apply to health FSAs.
Under the uniform coverage rule, an employee’s annual health FSA election amount (minus any reimbursements already made) must be available to him or her at any time during the plan year, regardless of how much the employee has contributed up to that point.
What is a health Flexible Spending Account (FSA)?
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This is a sample document provided by Group Health Solutions Inc.- SDL Brokerage Inc. 4
This Benefits Insights is not intended to be exhaustive nor should any discussion or opinions be
Which Approach is Best? Employers are increasingly looking to consumer driven health plans to help soften the
blow of continually rising health care costs. Depending on the model, these plans
typically include Health Reimbursement Arrangements (HRAs), Flexible Spending
Accounts (FSAs), Health Savings Accounts (HSAs) and Medical Savings Accounts (MSAs).
Some plans allow employees to use these accounts to pay for medical expenses that are
not covered by insurance, while employers use others to provide employees with a
fixed dollar amount with which they can purchase health care services. This article
provides some basic information about the similarities and differences between HRAs,
FSAs, HSAs and MSAs.
Medical Savings Accounts The original consumer-driven health plan, the Archer MSA, was an account that allowed
year-to-year rollovers and was designed to be combined with a high-deductible health
insurance policy. The high-deductible policy protected the insured from catastrophic
loss, such as a prolonged illness or hospitalization. The savings account was controlled
by the individual, and was intended to pay for routine health care services.
MSAs contained restrictions that reduced their practicality and appeal to employers and
employees. For example, tax-free MSAs were only available to the self-employed and
the employees of small businesses (under 50 employees). Large and medium-sized
employers and employees of companies that did not provide health insurance were not
eligible for an Archer MSA. The employer and employee could not both contribute to
the employee’s MSA in the same year.
While MSA accounts already established may continue to be used and receive
contributions, no new accounts may be established.
Health Savings Account The Medicare Prescription Drug, Improvement and Modernization Act of 2003
established a tax-favored health savings account (HSA). HSAs are much like MSAs, but
the rules applicable to HSAs are less restrictive.
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Consumer driven health
plans help soften the blow
of continually rising health
care costs. These plans are
Health Reimbursement
Arrangements (HRAs),
Flexible Spending Accounts
(FSAs), Health Savings
Accounts (HSAs) and
Medical Savings Accounts
(MSAs).
This is a sample document provided by Group Health Solutions Inc.- SDL Brokerage Inc. 5
Flexible
Spending
Accounts Flexible spending accounts, or FSAs,
provide you with an important tax advantage
that can help you pay health care and
dependent care expenses on a pretax basis.
By anticipating your family’s health care and
dependent care costs for the next plan year,
you can lower your taxable income.
Essentially, the Internal Revenue Service
(IRS) set up FSAs as a means to provide a
tax break to employees and their employers.
As an employee, you agree to set aside a
portion of your pretax salary in an account,
and that money is deducted from your
paycheck over the course of the year. The
amount you contribute to the FSA is not
subject to social security (FICA), federal,
state or local income taxes—effectively
adjusting your annual taxable salary. The
taxes you pay each paycheck and
collectively each plan year can be reduced
significantly, depending on your tax bracket.
As a result of the personal tax savings you
incur, your spendable income will increase.
The example that follows illustrates how an
FSA can save money.
Bob and Jane’s combined gross income is $30,000. They have two children and file
their income taxes jointly. Since Bob and Jane expect to spend $2,000 in adult
orthodontia and $3,000 for day care in the next plan year, they decide to direct a total of
$5,000 (both contributing the maximum amount of $2,500) into their FSAs. (See table)
Without FSA With FSA
Gross income $30,000 $30,000
FSA contributions $0 -$5,000
Gross income $30,000 $25,000
Estimated taxes
Federal -$2,550* -$1,776*
State -$900** -$750**
FICA -$2,295 -$1,913
After-tax
earnings $24,255 $20,561
Eligible out-of-
pocket medical
and dependent
care expenses
-$5,000 $0
Remaining
spendable income $19,255 $20,561
Spendable
income increase -- $1,306
This is a sample document provided by Group Health Solutions Inc.- SDL Brokerage Inc. 6
From Your Business
* Assumes standard
deductions and four
exemptions
** Varies, assumes 3
percent
This example is for
illustrative purposes only.
Every situation varies and
it is recommended you
consult a tax advisor for
all tax advice.
This is a sample document provided by Group Health Solutions Inc.- SDL Brokerage Inc. 7
This is a sample document provided by Group Health Solutions Inc.- SDL Brokerage Inc. 8
Flexible Spending Account Eligible Expenses Which expenses can be reimbursed by
an FSA?
Your Your Business Health Care
Reimbursement Flexible Spending
Account lets you pay for medical care
expenses not covered by your insurance
plan with pre-tax dollars. The expenses
must be primarily to alleviate a physical
or mental defect or illness, and be
adequately substantiated by a medical
practitioner. The products and services
listed below are examples of medical
expenses eligible for payment under your
Your Business FSA, to the extent that
such services are not covered by your
medical and dental insurance plan.
Unfortunately, we cannot provide a
definitive list of “qualified medical
expenses.” A determination of whether
an expense is for “medical care” is based
on all the relevant facts and
circumstances. To be an expense for
medical care, the expense has to be primarily for the prevention or alleviation of a
physical or mental defect or illness.
Under a rule that went into effect January 1, 2011, claims for over-the-counter medicine
or drug expenses (other than insulin) cannot be reimbursed without a prescription. This
rule does not apply to items for medical care that are not medicines or drugs.
• Abortion
• Acupuncture
• Alcoholism treatment
• Ambulance
• Annual physical examination
• Artificial limb
• Artificial teeth
• Bandages
• Birth control pills
• Body scan
• Braille books and magazines
• Breast pumps and supplies
• Breast reconstruction surgery
• Capital expenses (improvements or special equipment installed to a home, if
meant to accommodate a disabled condition)
• Car modifications or special equipment installed for a person with a disability
From Your Business
This is a sample document provided by Group Health Solutions Inc.- SDL Brokerage Inc. 9
Group Health Solutions Inc.- SDL Brokerage Inc.
FSA Video Content
This is a sample document provided by Group Health Solutions Inc.- SDL Brokerage Inc. 10
Employer Videos
FSA, HRA and HSA Eligible Expenses This video explains flexible
spending accounts (FSAs), health reimbursement arrangements (HRAs) and health savings accounts (HSAs) and gives details on the different aspects of each type of account.
FSAs: An Introductory Video This
video explains what FSAs are, how they work, and how they can be advantageous
to your organization.
FSAs and the Uniform Coverage Rule This video explains the Uniform Coverage Rule, which states that all funds to be contributed to a flexible spending account (FSA) must be available at all times throughout the year.
Employee Videos
Health FSAs This video explains what
flexible spending accounts are (FSAs) and provides details on health FSAs, which are the most common type.
