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Flexible Spending Arrangements (FSAs)

A health flexible spending arrangement (FSA) allows employees to be reimbursed for medical expenses. FSAs are  usually funded through voluntary salary reduction agreements with your employer. No employment or federal income taxes are deducted from your contribution. The

employer may also contribute.

     Note. Unlike HSAs or Archer MSAs which must be reported on Form 1040 or Form 1040NR, there are no reporting requirements for FSAs on your income tax return. For information on the interaction between a health FSA

and an HSA, see  Other employee health plans under Qualifying for an HSA, earlier.

What are the benefits of an FSA? You may enjoy several benefits from having an FSA.

Qualifying for an FSA

Health FSAs are employer-established benefit plans. These may be offered in conjunction with other employer-provided benefits as part of a cafeteria plan. Employers have complete flexibility to offer various combinations of benefits in designing their plan. You do not have to be covered under any other health care plan to participate.


Self-employed persons are not eligible for an FSA. Certain limitations may apply if you are a highly compensated participant or a key employee.

Contributions to an FSA

You contribute to your FSA by electing an amount to be voluntarily withheld from your pay by your employer. This is sometimes called a salary reduction agreement. The employer may also contribute to your FSA if specified in

the plan.

You do not pay federal income tax or employment taxes on the salary you contribute or the amounts your employer contributes to the FSA. However, contributions made by your employer to provide coverage for long-term care insurance must be included in income.

When To Contribute

At the beginning of the plan year, you must designate how much you want to contribute. Then, your employer will deduct amounts periodically (generally, every payday) in accordance with your annual election. You can change or revoke your election only if there is a change in your employment or family status that is specified by the plan.

Amount of Contribution

There is no limit on the amount of money you or your employer can contribute to the accounts; however, the plan must prescribe either a maximum dollar amount or maximum percentage of compensation that can be contributed to your health FSA.

Generally, contributed amounts that are not spent by the end of the plan year are forfeited. See Balance in an FSA, later. For this reason, it is important to base your cluded from your gross income. contribution on an estimate of the qualifying expenses you will have during the year.

     Note. For tax years beginning after 2012 your contribution to your flexible spending arrangement made through a salary reduction is limited to $2,500. Beginning in tax years after 2013 the limit will be subject to a cost-of-living adjustment.

Distributions From an FSA

Generally, distributions from a health FSA must be paid only to reimburse you for qualified medical expenses you incurred during the period of coverage. You must be able to receive the maximum amount of reimbursement (the amount you have elected to contribute for the year) at any time during the coverage period, regardless of the amount you have actually contributed. The maximum amount you can receive tax free is the total amount you elected to contribute to the health FSA for the year.

You must provide the health FSA with a written statement from an independent third party stating that the medical expense has been incurred and the amount of the expense. You must also provide a written statement that the expense has not been paid or reimbursed under any other health plan coverage. The FSA cannot make advance reimbursements of future or projected expenses.

Debit cards, credit cards, and stored value cards given to you by your employer can be used to reimburse participants in a health FSA. If the use of these cards meets certain substantiation methods, you may not have to provide additional information to the health FSA. For information on these methods, see Revenue Ruling 2003-43 on page 935 of Internal Revenue Bulletin (IRB) 2003-21 at www.irs.gov/pub/irs-irbs/irb03-21.pdf, Notice 2006-69, 2006-31 I.R.B.107 available at  www.irs.gov/irb/ 2006-31_IRB/ar10.html, and Notice 2007-2, 2007-2 I.R.B. 254 available at www.irs.gov/irb/2007-2_IRB/ar09.html.

Qualified medical expenses. Qualified medical exinsurance must be included in income. penses are those specified in the plan that would generally qualify for the medical and dental expenses deduction.  These are explained in Publication 502, Medical and Dental Expenses.

Note. Non-prescription medicines (other than insulin) purchased in tax years beginning after December 31,

2010, are not considered qualified medical expenses. See Qualified medical expenses under What’s New, earlier.

Qualified medical expenses are those incurred by the following persons.

1. You and your spouse.

2. All dependents you claim on your tax return.

3. Any person you could have claimed as a dependent on your return except that:

a. The person filed a joint return,

b. The person had gross income of $3,700 or more,


c. You, or your spouse if filing jointly, could be claimed as a dependent on someone else’s 2011 return.

4. Your child under age 27 at the end of your tax year. You cannot receive distributions from your FSA for the following expenses.

If you are covered under both a health FSA and an HRA see Notice 2002-45, Part V, which is on page 93 of IRB 2002-28 at www.irs.gov/pub/irs-irbs/irb02-28.pdf.


You cannot deduct qualified medical expenses as an itemized deduction on Schedule A (Form 1040) that are equal to the distribution you receive from the FSA.

Qualified HSA distribution. This is a distribution from your health FSA that is transferred to your HSA, discussed earlier. The distribution must not be more than the lesser of the balance in the health FSA:

If you were not covered by a health FSA on September 21 2006, you cannot elect to make a qualified HSA distribution from the health FSA. If you were covered by a health FSA with an employer on September 21, 2006, but change employers after that date, you cannot elect to make a

qualified HSA distribution from your second employer’s health FSA.

The following conditions must be met to make a qualified HSA distribution.

Only one qualified HSA distribution is allowed for each health FSA.

For more information, see Notice 2007-22, 2007-10 I.R.B. 670 available at www.irs.gov/irb/2007-10_IRB/ar10. Html.

If you do not remain an eligible individual for HSA purposes during the testing period, the distribution is in-

cluded in your income and is subject to a 10% additional tax. See Qualified HSA distribution under Health Savings Accounts (HSAs), earlier.

Qualified reservist distribution. A special rule allows amounts in a health FSA to be distributed to reservists ordered or called to active duty. This rule applies to distributions made after June 17, 2008, if the plan has been amended to allow these distributions. Your employer must report the distribution as wages on your Form W-2 for the year in which the distribution is made. The distribution is subject to employment taxes and is included in your gross income.

A qualified reservist distribution is allowed if you were (because you were in the reserves) ordered or called to active duty for a period of more than 179 days or for an indefinite period, and the distribution is made during the period beginning on the date of the order or call and ending on the last date that reimbursements could otherwise be made for the plan year that includes the date of the order or call.

Balance in an FSA

Flexible spending accounts are “use-it-or-lose-it” plans. This means that amounts in the account at the end of the plan year cannot be carried over to the next year. However, the plan can provide for a grace period of up to 2½ months after the end of the plan year. If there is a grace

period, any qualified medical expenses incurred in that period can be paid from any amounts left in the account at the end of the previous year. Your employer is not permitted to refund any part of the balance to you. See Qualified HSA distribution and Qualified reservist distribution, earlier.

Employer Participation

For the health FSA to maintain tax-qualified status, employers must comply with certain requirements that apply to cafeteria plans. For example, there are restrictions for plans that cover highly compensated employees and key employees. The plans must also comply with rules applicable to other accident and health plans. Chapters 1 and 2 of Publication 15-B, Employer’s Tax Guide to Fringe Benefits, explain these requirements.

Source:  www.IRS.gov

Flexible Spending Accounts

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Employer Resources

Understanding Your Fiduciary Responsibilities Under A Group Health Plan by DOL.gov

Employer Requirements


Federal Acts & Legislations

Employee Benefits Compliance Articles & Links

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