A Flexible Spending Account is a benefit provided by an Employer that lets employees set aside a certain amount of their paycheck into an account before paying income taxes. Then, during the year the employee can be directly reimbursed from their account(s) for qualified health care and dependent care expenses.
There are two types of FSAs:
- An Unreimbursed Medical FSA reimburses participants for out-of-pocket health care expenses for medical, dental, vision or hearing expenses.
- A Dependent Care FSA reimburses participants for dependent daycare expenses they incur in order to allow the participant (and their spouse) to work.
For more details, including eligible expenses, visit our Flexible Spending Accounts section.
Only employees are eligible to participate. Self-employed individuals, partners and shareholder employees of a Subchapter S corporation who directly or indirectly own more than two percent of the company's stock are ineligible to participate. A partnership, sole proprietor or Subchapter S corporation may, however, offer a Section 125 plan to its employees.
The period of coverage for an FSA is 12 months, except when a short plan year is permissible (for a first plan year or when a plan year is being changed). This means that an employee's election to participate must be in effect for the entire plan year.
Q. Why should a member participate in the Unreimbursed Medical FSA when they already have health insurance?
This account is used to reimburse members for expenses that are not covered by insurance. For example, a member’s insurance may not cover annual physicals, copayments, eye exams, eye surgery, glasses, orthodontics or prescription drugs.
The plan can be administered through Employer Online Services. Administrators can add/edit/terminate employees, or view and edit information on employees currently enrolled in the FSA. FSA payroll deductions are also managed electronically through Employer Online Services.
No. Their net take-home pay will increase by the amount of taxes they did not pay.
For the Unreimbursed Medical FSA, they can only make a change if they have a qualified change in family status, such as: marriage, birth, adoption, or a change in their or their spouse's employment status. For the Dependent Care FSA, members may also make a change if they experience a cost or coverage change in Dependent Care expenses during the plan year.
If the member’s family income is over $40,000, they will most likely benefit from this plan rather than taking advantage of the current income tax credit. The amount they deposit in their Dependent Care Account reduces the amount, dollar for dollar, that they can claim as a credit on their tax return.
Once they have elected to enroll in the program, the member receives a Welcome Kit mailed to their home address, including instructions on how to file their claims. Our website allows members to submit their claims electronically, or they may download FSA Claim Forms for paper submission. Reimbursement checks are made payable to them and mailed to their home address.
Q. Do members have to wait for the money to be deposited into their FSA to make a reimbursement claim?
The annual amount they set aside each year for the Unreimbursed Medical FSA is available to the member at any time throughout the plan year. The amount available to them from their Dependent Care FSA is the amount they have contributed to date.
With each reimbursement check, an attached statement provides them with a YTD description of their account(s), including annual election, deposits to date, claims received and paid to date, denied claims and account balance. They may also check their account online. The website provides account balance information and detailed claims and payment information as well.
Q. What happens to an Unreimbursed Medical FSA if the member terminates employment or is terminated?
Members can request reimbursement for any expenses incurred prior to their termination date for the Unreimbursed Medical Spending Account plan.
Any contributions not used during the plan year will be forfeited and cannot be paid to them in cash or used in a later plan year.
Amounts forfeited from FSAs revert back to the employer and, in general, are used by the employer to help defray the administrative costs of the plan.
In 2001, final regulations were released for both COBRA and Section 125 Plans. For plans beginning on or after January 1, 2000, an Unreimbursed Medical FSA need not offer COBRA continuation coverage to a participant if, as of the date of the qualifying event, the maximum benefit available under the plan for the remainder of the year is not more than the maximum amount that the plan could require as payment for the remainder of that year to maintain coverage.
Effective immediately, the Internal Revenue Service has indefinitely suspended the requirement to file Schedule F (Form 5500) "Fringe Benefit Plan Annual Information Return" for Small Employer (less than 100 participants), Church, and Public Sector plans. The suspension of Schedule F filing applies to ALL plan years, including years prior to 2001.
Though a plan may still be required to file the Form 5500 (but no Schedule F) if they segregate participants' contributions from the employer's general assets. Separately maintained funds for a Health FSA would require filing the Form 5500.
A participant who is terminating employment with a company might want to elect COBRA coverage if he or she expects to incur medical expenses after the date of termination, and money is available in the Health FSA that might otherwise be forfeited.
The following plans are exempt:
- Plans of employers that employed less than 20 employees on more than 50% of their typical business days in the previous calendar year.
- Plans sponsored by the federal government.
- Plans sponsored by churches and certain church-related organizations.
The member and their family can still participate in the Unreimbursed Medical and Dependent Care FSAs.
Their biggest advantage is the tax savings. Every dollar they set aside in their account reduces how much they pay later in income taxes. Plus, they can be reimbursed for qualified expenses that they are already paying for.
Yes. Because they are not paying Social Security tax on that portion of their income that has been set aside, their Social Security benefits may be slightly reduced. Most tax advisors would tell you that the benefit of saving taxes now will be far greater than the potential loss of Social Security benefits when they retire.