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Flexible Spending Arrangements (FSAs)
(Source: www.irs.gov as of 02/22/11)
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.
- Contributions made by your employer can be excluded from your gross income.
- No employment or federal income taxes are deducted from the contributions.
- Withdrawals may be tax free if you pay qualified medical expenses. See Qualified medical expenses, later.
- You can withdraw funds from the account to pay qualified medical expenses even if you have not yet placed the funds in the account.
Qualifying for an FSA
Health FSAs are employer-
Self-
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-
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 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 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-
www.irs.gov/irb/2006-
www.irs.gov/irb/2007-
Qualified medical expenses. Qualified medical expenses 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. However, even
though non-
(other than insulin) do not qualify for the medical and dental expenses deduction, they do qualify as expenses for FSA purposes.
Note:
After 2010, non-
New for 2011, earlier.
Qualified medical expenses are those incurred by the following persons.
- You and your spouse.
- All dependents you claim on your tax return.
- 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 $3,650 or more, or
c. You, or your spouse if filing jointly, could be claimed as a dependent on someone else's 2010 return.
4. Effective March 30, 2010, your child under age 27 at the end of your tax year.
You cannot receive distributions from your FSA for the following expenses.
- Amounts paid for health insurance premiums.
- Amounts paid for long-
term care coverage or expenses. - Amounts that are covered under another health plan.
If you are covered under both a health FSA and an HRA, see Notice 2002-
www.irs.gov/pub/irs-
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.