As health care premiums continue to increase at a rapid rate, employers are continually “shifting” costs to employees in the form of higher co-pays, deductibles and out-of-pocket costs. To help offset some of the sting associated with these higher out-of-pocket expenses many employers are implementing Health Care Flexible Spending Account (FSA) plans.
An FSA plan allows employees to pay for certain unreimbursed healthcare and dependent care expenses with before-tax dollars. For most employees, the FSA plan provides a better tax benefit than is available to them as an individual taxpayer. For employers, an FSA plan can significantly enhance an employer's overall benefits program and/or reduce some of the pain of the inevitable cutback in benefits to employees.
How to Participate in a Health Care Flexible Spending Plan
To participate in an FSA plan employees are required to make irrevocable benefit elections prior to the beginning of each plan year. When making an election to participate in a flexible spending account, employees must carefully specify how much, if any, pre-tax salary they wish to contribute to the plan. It is important that employees carefully estimate the amount they believe they might spend in the upcoming year because money not spent is forfeited.
What Medical Expenses Are Reimbursed Through a Health Care Flexible Spending Account?
Medical expenses that may be reimbursed through a Health Care FSA are those that are excludable from gross income under tax code Section 213, and are not reimbursable under any other health plan coverage. This could include expenses for:- Deductibles,
- Co-payments,
- Dental services,
- Prescriptions drugs,
- Over the counter medications,
- Emergency ambulance service,
- Chiropractic services,
- Eyeglasses, including contact lenses,
- Hearing devices, and
- Psychiatric care.
When May Employees Make Changes in a Health Care Flexible Spending Plan?
While the election to participate in an FSA plan is made annually, plan sponsors may permit employees to make changes in benefit elections only under the following conditions:
- Change in legal marital status,
- Change in number of dependents,
- Change in employment status,
- Change in work schedule that changes a participant’s eligibility in the plan,
- Dependent satisfies or ceases to satisfy eligibility requirements,
- Significant change of residence or work-site, and
- Judgment decrees or orders pertaining to child or spouse.
Employees who terminate their employment before the end of the plan year have several options. They may forfeit their account balances, if they fail to continue scheduled contributions and revoke their benefit elections; or, they may continue to contribute to the FSA through COBRA until year's end, thereby continuing to be covered by the plan until the end of the plan year.
If the plan has forfeitures at the end of the plan year, employers may use forfeitures toward offsetting "reasonable" administrative costs incurred during the plan year. Or, employers may credit experience gains to employees' FSA plan in the following plan year, as long as the funds are allocated on a "reasonable and uniform" basis to all of the FSA plan participants. The funds may be allocated on a per capita basis or according to the level of coverage selected under the plan. In no event may a participant’s forfeiture be returned directly to the participant.
On the next page, read about Health Care Flexible Spending Accounts Claims and Debit Card Options.
