A flexible spending account (FSA) is an account in an employee’s name that reimburses the employee for qualified health care or dependent care expenses. It allows an employee to fund qualified expenses with pre-tax 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.
Health FSAs are a popular benefit with employees, and are affordable for employers to implement and maintain.
Health FSAs offer an option for setting aside money to use for qualified medical expenses. These accounts offer a convenient way to prepare for out-of-pocket medical expenses while saving on taxes. In addition, you can use your health FSA to pay not only for your medical expenses, but also for the medical expenses of your spouse and dependents.
Health FSA funds can be used on "qualified medical expenses". The IRS states that to meet this qualification an expense has to be primarily for the prevention or alleviation of a physical or mental defect or illness. While we can't provide a definitive list, this resource covers manyExamples of FSA-eligible Expenses.
Employees can use their FSA in-person and online, and can increasingly find online vendors that easily allow employees to view items that are FSA eligible.
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 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 to choose an amount that will cover medical or dependent care expenses, but that is not so high that the money will be forfeited at the end of the year.
The IRS allows employers to offer an extended deadline, or grace period, of 2 ½ months* after the end of a plan year to use FSA funds. Thus, for a plan year ending Dec. 31, employees would have until March 15 to spend the funds in their FSAs. This provision is strictly optional; the employer must choose to implement it.
In addition, employers may allow participants to carry over up to $550* in unused funds into the next year. Similar to the grace period rule, this carry-over rule is strictly optional, and employers must choose to implement it. The carry-over provision is only available if the plan does not also incorporate the grace period rule.
A Dependent Care Assistance Program (DCAP) or Dependent Care FSA is an employer-sponsored program that helps employees with the cost of dependent care expenses. It establishes an account from which an employee may seek reimbursement for eligible dependent care expenses. In most cases, a DCAP account is funded by employees with pre-tax dollars through payroll deductions.
For more information on FSA plan design and compliance, contact us today.