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Flexible Spending Arrangements (FSAs)

A health Flexible Spending Arrangement (FSA) is an account that allows employees to be reimbursed for certain out of pocket 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. There are no reporting requirements for FSAs on your income tax return.

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.

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 and after each new year.

Amount of Contribution

Employers may only contribute a maximum of $2,500.  This will be adjusted annually to account for inflation and is per employee, regardless of whether you cover just yourself or your full family.  Because it is per employee, if a husband and their spouse both work they can both claim the $2,500 contribution maximum, for a total of $5,000.

Generally, contributed amounts that are not spent by the end of the plan year are forfeited to the employer. For this reason, it is important to base your contribution on an estimate of the qualifying expenses you will have during the year.

Distributions From an FSA

Generally, distributions from a health FSA must be paid only to reimburse you for qualified medical expenses (IRS Qualified 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.

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.

Limits on an FSA

Under the Patient Protection and Affordable Care Act (PPACA), health care Flexible Spending Accounts (FSAs) have a newly-imposed $2,500 maximum contribution limit effective January 1, 2013. Maximum contribution limits will then be adjusted for inflation – or deflation – in subsequent tax years.

This new $2,500 limit pertains to all plans, even those grandfathered under other provisions of the PPACA.

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