A health Flexible Spending Account (FSA) is an employer-sponsored plan that reimburses out-of-pocket medical expenses for participants and their families. It is voluntary, meaning the participant can choose if they want to fund the account with pre-tax dollars.


Save Big with PrimePay’s Benefit Services

PrimePay helps with the administration of FSAs for your company, no matter the size or choice of plan.

LEARN MORE


Remember, this is a flexible spending account, so funds are meant to be used within a plan year. Generally, the plan year must be a fixed 12-month period.

Health FSAs Facts

Types of Health FSAs

There are two types of health FSAs you can elect to sponsor:

  1. General Purpose Health FSAs
    • This FSA can be used to reimburse all medical expenses defined under Internal Revenue Code section 213(d). These accounts are used to pay for things such as deductibles, co-pays, prescriptions, eyeglasses, and orthodontia expenses.
  2. Limited Purpose Health FSAs
    • It can only be used to reimburse dental, vision, and preventive care expenses.

Health FSA Contribution Limits

The health FSA maximum annual contribution limit set by the Internal Revenue Service (IRS) is indexed annually for inflation. In 2019, the health FSA maximum contribution limit is $2,700. There is no separate family maximum, however, if two spouses both contribute to separate health FSAs, they may each contribute up to $2,700 each.

Use it or Lose it Rule

Health FSAs are subject to the use-or-lose rule. This means that any funds not used during the plan year will be forfeited to the employer. Luckily, the IRS allows two exceptions to this rule: the rollover or grace period.

  1. Rollover 
    • If all the money is not used by the end of the plan year, $500 can be rolled over into the next plan year.
  2. Grace Period
    • This extends the plan year by an additional two and a half months, allowing the participant extended time to incur expenses to pay down the previous year’s balance.

An employer is not required to implement either of these provisions, but it cannot choose both. If an employer decides to offer a rollover or grace period, it must be included in their plan document.

An employer can also implement a run-out period in connection with either a rollover or grace period. This provision allows participants additional time to submit claims incurred during the plan year and must be included in their plan document

Health FSA Benefits Process

The benefit process under an FSA is quite simple. To start, the participant will need to elect an amount to contribute annually to the account. This amount will be prorated as salary reductions throughout the plan year. Because of the use-or-lose rule, participants should be careful to estimate expenses prior to making their election. Once the participant selects the amount, they are only allowed to change their election during the plan year if they experience an election change event permitted by the IRS (ex. the birth of a child).

The good news for employees is that with a health FSA, the participant has access to the entire balance elected as of the first day of the plan year. This is called the uniform coverage rule.

FSA Compliance Checklist

Like other cafeteria plans, health FSAs are subject to documentation requirements. Employers are required to have a written plan document and summary plan description, which must be distributed to all participants.

Health FSAs Compliance Rules

Health FSAs:

  • Must complete annual nondiscrimination test (NDT), which needs to be completed during the plan year.
    • Health FSA contributions must be included in the section 125 testing; in addition, health FSAs are subject to testing under section 105.
  • Are subject to COBRA. A special limited COBRA obligation may apply if the FSA qualifies as an excepted benefit.
    • Under this limited obligation, an employer must only offer COBRA for the health FSA if the participant has a positive account balance at the time of their qualifying event.
      • A health FSA will qualify as an excepted benefit if the maximum annual benefit does not exceed two times the participant’s salary reduction election (or $500, if greater) and the employer sponsors a traditional group health plan; or the health FSA only reimburses limited benefits (such as dental and vision).
    • In addition, the employer can terminate their COBRA coverage for the health FSA at the end of the plan year in which the qualifying event occurred.
  • Must be paired with a group medical plan to satisfy the requirements of health care reform.
    • Employers that do not sponsor a group health plan are not eligible to sponsor a health FSA, unless it is a limited purpose benefit (ex. only reimbursing dental, vision, and preventive care expenses).
    • In addition, the employer should be careful to limit eligibility in a general-purpose FSA to those individuals eligible for the group medical plan.
  • Are considered a group health plan and, as such, are subject to the reporting and disclosure requirements under the Employee Retirement Income and Security Act of 1974 (ERISA). Are subject to PCORI fees, as a self-insured group health plan.
    • The Patient-Centered Outcomes Research Institute (PCORI), is a nonprofit corporation created by health care reform to support clinical effectiveness research.
    • Health FSAs will be exempt from PCORI fee requirements if it qualifies as an excepted benefit.
    • PCORI fees are due by July 31st of the year after the plan year ends. PCORI fees are expiring this year, for plans ending on or after October 1, 2019.  

How PrimePay Can Help

PrimePay helps with the administration of pre-tax benefits for your company, including HRAs, HSAs, and FSAs. When you choose PrimePay’s pre-tax benefit plan administration, you receive a dedicated service team, access to our support portal, automated claims processing, and a PrimePay debit card and mobile app. Click here to learn more or fill out the form below:

This article is an excerpt from our blog, Pre-tax Benefits: Everything You Need to Know. Click here to learn about what pre-tax benefits your small business can offer.

Disclaimer: Please note that this is not all inclusive. Our guidance is designed only to give general information on the issues actually covered. It is not intended to be a comprehensive summary of all laws which may be applicable to your situation, treat exhaustively the subjects covered, provide legal advice, or render a legal opinion. Consult your own legal advisor regarding specific application of the information to your own plan.