Employees who are covered under an employer-sponsored health insurance plan can supplement their health coverage through a Flexible Spending Account (FSA).
Employer-sponsored Flexible Spending Accounts must comply with IRS rules and regulations. FSAs offer employees the ability to pre-fund anticipated medical expenses that are not otherwise covered under the health insurance plan. Flexible Spending Accounts can be used to cover deductible expenses, co-payments, chiropractic care and other services from medical professionals that are not otherwise covered under the employee’s health insurance plan.
Why Enroll in a Flexible Spending Account
There are several benefits to enrolling in a company sponsored Flexible Spending Account.
- Contributions are not taxable and are deducted from the employee’s gross income. This serves to lower the employee’s gross annual income and therefore reduce the tax liability.
- Withdrawals from the Flexible Spending Accounts are tax-free as long as the funds are used to pay qualified medical expenses.
- Employees can withdraw funds to pay for qualified medical expenses even if the current balance in the flexible account has not quite reached the amount needed to fund the medical expense.
The Enrollment Process
Enrollment in a Flexible Spending Account occurs at the beginning of the plan year. Employees who miss the beginning of the plan enrollment period must wait until the following year to join.
At the time of enrollment, participants must decide how much money to contribute to the account. The amount is usually deducted throughout the year in the form of payroll deduction until the account is fully funded.
Withdrawing Money from Flexible Savings Accounts
Since distributions can only be made to pay for qualified medical expenses, participants must provide proof of expenditure. Acceptable forms of proof include but are not limited to written statement from the medical care provider, or invoice showing the medical expense incurred and the cost for such services. Employees must also affirm that the expense was not covered or reimbursed by a health insurance plan.
End of the Year Balances
Care must be taken when determining how much money to contribute because Flexible Spending Accounts are a “use it or lose it” type of plan. Employees are not allowed to change the contribution amount during the year. If the funds in the account are not used by the end of the year, the money is forfeited.
There is a ray of hope, however. The Internal Revenue Service provides for a two and a half month grace period for which plan participants can submit expenses incurred within the grace period. Those expenses can be reimbursed using the remaining funds from the end of the year FSA balance.