What is a Flexible Spending Account (FSA)?

A Flexible Spending Account allows employees to set aside pre-tax money for certain healthcare expenses. Employees can put money directly into this account for out-of-pocket costs. Employees who incur a qualifying expense can submit proof and receive a reimbursement.

Employers can contribute to their employees’ FSAs but are not required.

What expenses are eligible for reimbursement?

Examples of eligible medical expenses:

• Insurance copayments and deductibles
• Qualified prescription medications
• Some over-the-counter medications with a prescription
• Insulin 
• Medical devices
• Medical equipment such as bandages, crutches, or blood sugar test kits
• Eye exams
• Glasses or contact lenses

What is the “use it or lose it” rule?

Upon enrollment, employees select the amount they would like to contribute to the account each year. At the end of the year, employees forfeit unused funds. Ideally, the amount in the account will cover the employee’s medical expenses for the year without a surplus at the end. 

Employees cannot modify the contribution amount during the year.

Employers may offer a grace period for employees to use funds or dictate a certain balance they can sometimes carry over. However, the employer must choose to opt into this provision.

What are the types of FSAs?

There are two types of FSAs, and employees may have either or both simultaneously. However, these accounts are kept separate.

Health Care Accounts

This type of account allows employees to receive reimbursement for medical costs up to the amount they choose to contribute for the year.

Section 213(d) of the Tax Code dictates covered items. It defines “medical care” as funds paid “for the diagnosis, cure, mitigation, treatment or prevention of disease, or to affect any structure or function of the body.”

Employees can contribute up to $3,200 to this account in 2024.

Dependent Care Accounts

Employees can use this second type of account to fund care for dependent children under 13. Participants can also use these funds to care for a dependent who is a disabled spouse, parent, or child if they are over the age of 12. Reimbursements to account holders are for incurred dependent care expenses only.

Dependent Care Account funds are similarly not eligible for use after the end of the policy year.

For 2024, most people can contribute up to $5,000 to this account.

Ready to provide your employees with their own FSA options? Contact our team HERE, and we can provide you with more information.

Source: Zywave “Flexible Spending Accounts (FSA)”