Flexible Spending Arrangements
A Flexible Spending Arrangement (FSA) is a self-insured medical reimbursement arrangement. The period of coverage is typically 12 months unless a short plan year is necessary due to a valid business reason. The grace period permits participants to incur eligible expenses for a total of 14-and-a-half months. At anytime during the period of coverage, the participant's total annual election must be available for reimbursement, regardless of how much has been contributed. Whatever balance is left at the end of the plan year is forfeited. This is commonly known as the "use-it-or-lose-it" rule.
Health FSAs are typically funded by employee contributions. However, an employer may also choose to contribute to employee accounts. An FSA is a self-insured arrangement, so it is subject to the self-insured non-discrimination rules which would prohibit an employer from contributing different amounts based on compensation, age, or years of service.
Eligible Expenses
An eligible expense under a health FSA is a qualified medical expense that is incurred during the period of coverage by the employee, the employee's spouse, or the employee's tax dependent. A qualified medical expense must be for "the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body" (26 USC 213(d)(10(A)). Certain over-the-counter medications are eligible expenses, but insurance premiums are not eligible for reimbursement.
The proposed Treasury Regulations released August 3, 2007 state that every claim for reimbursement under a cafeteria plan (including a health FSA expense) must be substantiated. The claim must be substantiated by a third party verifying the service, the date of service, and the amount. Self-substantiation or self-certification of an expense by the participant does not meet the requirement. Substantiation only of claims exceeding a certain dollar amount or substantiation of a certain percentage of claims also does not meet the requirement. An expense that is a reoccurring expense of a previously substantiated claim may be reimbursed without further substantiation. For the expense to be reoccurring, the amount, provider, and time period must be the same as previously substantiated.
For a list of eligible expenses, please see the link below in the Additional Resources section.
FAQs
If a terminating employee has received reimbursement from his health FSA for an amount greater than he has contributed to the account, can the employer require that the employee reimburse the employer for the expenses that are in excess of his year-to-date contributions?
No, the employer may not require the employee to reimburse the employer for the amount that exceeded his FSA contributions. This is known as the Uniform Coverage Rule, which requires an employee's election amount to be available for reimbursement at any time during the FSA period of coverage regardless of the total contributions received, as long as it is a qualified medical expense and the expense was incurred during the period of coverage.
Under what circumstances can employees change their health FSA elections mid-year?
As a qualified benefit under a Section 125 Cafeteria Plan, participant health FSA elections are governed by the Section 125 rules regarding election changes. Upon the decision of the plan sponsor and amendment of the plan document, a cafeteria plan may permit mid-year health FSA changes based on the following events:
- Change in status (including marital status, number of dependents, employment status, dependent ceases to satisfy eligibility requirements, or adoption. Please note that a change in residence does not allow for a health FSA election change.)
- Receipt of a qualified medical child support order (QMCSO)
- Entitlement to Medicare or Medicaid
- Leave of absence under FMLA or USERRA
Elections may also be changed in regards to HIPAA Special Enrollment Rights, which include the loss of other health coverage and acquisition of a new dependent through birth, adoption, or marriage. For more information on Special Enrollment Rights, please see the HIPAA section of this website.
Election changes must be consistent with and on account of the qualified event.
Additional Resources
The above links are provided for your information only. NFP does not endorse, nor accept any responsibility for the content, products and/or services provided at non-NFP sites. Some information contained in the NFP site is provided by third parties. We do not independently verify this information, nor do we guarantee its accuracy or completeness. Information provided from governmental agencies is subject to change.