What are flexible spending accounts?
Flexible spending accounts (FSAs) have become a large part of the cafeteria plan picture. FSAs can be used to pre-fund
health care or dependent care expenses in pre-tax dollars. A health care FSA cannot be used to pay for health care insurance premiums. Dependent care assistance FSAs are limited to $5,000 per year. There is no maximum limit on health care FSAs.
An employee is not entitled to recover any unused amounts in the FSA at the end of the plan year (or grace period, if applicable). See ¶42,345
for more about the use-it-or-lose-it
principle.
Using FSAs. An FSA provides an account in an employee's name that is used to reimburse the employee for certain personal expenses. FSAs are provided by employers as a way for employees to pre-fund dependent care, medical, or dental expenses in pre-tax dollars. Health care spending accounts and dependent care spending accounts are subject to special rules and limits.
Enrollment form. An employee wishing to participate in an FSA must complete an enrollment form. Amounts placed into the FSA are deducted from the employee's paycheck.
Levels of coverage. A single FSA may provide participants with different levels of coverage and different maximum amounts of reimbursements.
An employer with 1,000 employees maintains a cafeteria plan under which the employees may elect several benefit options, including insured health plans and HMOs. The plan provides that the required premiums or contributions for the benefits are to be made by salary reduction. Even though the plan may characterize employees' premium payments and other contributions as flexible spending contributions or credits, the operation of a cafeteria plan to permit employees' contributions to be made on a salary reduction basis does not, standing alone, cause the plan (or any benefit thereunder) to be treated as an FSA.
An employer with 1,000 employees maintains a cafeteria plan under which the employees may elect, among other benefits, a level of coverage under an arrangement that will reimburse medical expenses incurred during a year up to the specified amount elected by the employee. The maximum amount of reimbursement that can be deducted for a year is $5,000. Because each employee's premium for such coverage is equal to the maximum reimbursement amount selected by the employee, this arrangement is a health FSA.
How does an FSA work?
An FSA provides a method for an employee to pay for dependent care or medical and dental expenses with pre-tax dollars. Through payroll deductions, an employee may contribute to one or more separate accounts before any withholding for federal income tax, FICA (Social Security tax), and, in most areas, state and local income tax. As eligible expenses are incurred and claims are submitted, the employee is reimbursed from the proper account.
However, if there are multiple accounts (for example, one for health care expenses and one for dependent care expenses), they are kept separate. An employee cannot be reimbursed for health care expenses out of the dependent care spending account, even if the health care spending account balance has been exhausted and the dependent care spending account has not been used during the year.
<p>Flexible spending accounts (FSAs) have become a large part of the cafeteria plan picture.</p>
What are flexible spending accounts?
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