Many employers offer their employees flexible spending accounts, or FSAs. Just what is an FSA? An FSA reimburses the employee for certain eligible expenses, as part of a plan established under Code Section 125 (sometimes called a cafeteria plan or a flexible benefit plan), which permits the employee to make pre-tax salary reduction contributions.
FSAs have certain characteristics:
- A written plan document is required to establish these accounts.
- An FSA can either be a health care flexible spending account (under Code Section 105) or a dependent care flexible spending account (under Code Section 129).
- Employers may, but are not required to, make contributions to these accounts on behalf of employees. FSAs are primarily intended as a way for employees to reduce their taxable income, so participant contributions are usually the main funding mechanism.
- In addition to the nondiscrimination requirements of Code Section 125, both types of FSAs have their own nondiscrimination tests that must be passed to ensure that higher-paid employees do not benefit disproportionately.
- Elections to participate in an FSA must be made prior to the start of participation or beginning of the new plan year.
- Mid-year changes to FSA elections are not permitted except in certain limited situations.
- Amounts in the FSAs unused at the end of the plan year (subject to any grace period or carryover) are forfeited by the participating employee, so careful planning is required.
In addition to the above, which applies to both types of FSAs, each has some unique characteristics:
Health Care FSAs:
- A health care FSA allows for reimbursement of eligible out-of-pocket medical care expenses.
- It is a group health plan subject to ERISA, and certain other group health care requirements such as COBRA and HIPAA.
- As an ERISA plan, health care FSAs must have a summary plan description (SPD) that is distributed to participants and file a Form 5500 (unless a filing exception applies)
- Contributions to a health care FSA are limited to a maximum amount set by law and indexed for cost of living ($2,850 for 2022, the 2023 limit has not yet been announced) or a lesser limit set forth in the plan document.
- A health care FSA can either be a full or limited health care FSA. Limited health care FSAs permit reimbursement only for limited medical care expenses such as dental, vision, and preventative care, that are not impermissible health coverage for purposes of health savings account (HSA) eligibility
Dependent Care FSAs:
- A dependent care FSA allows for reimbursement of eligible dependent care expenses.
- Eligible dependent care expenses are expenses for the care of a dependent necessary for the employee and/or spouse to work, or to look for work.
- Dependent care FSA contributions are limited to $5,000 per plan year, or a lesser limit set forth in the plan document.
- A dependent care FSA is not subject to ERISA, so an SPD is not required, although it is important to communicate the main features of the benefit to participants. In addition, no Form 5500 filing is required.
Note that an FSA is different than the similar-sounding HRA (health reimbursement arrangement) and HSA (health savings account). There are many other aspects of FSAs that are important to be aware of in order to establish, maintain, and administer an FSA plan. If you have any questions, the attorneys of KLB Benefits Law Group are available to help you with answers.