September 13, 2024
A flexible spending arrangement (“FSA”) is a benefit program that provides employees an opportunity to contribute pre-tax money to the account. Eligible medical expenses are reimbursed tax-free.
Health Care Costs
Health FSAs allow employees to be reimbursed for health care, dependent care or other expenses that would otherwise be excludable from gross income. Amounts contributed by employees are not subject to federal income tax, social security tax or Medicare tax. Medical care includes amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease. Medicines and drugs are expenditures for medical care. Over-the-counter medicine (whether or not prescribed) and menstrual care products are considered medical care and are considered a covered expense.
FSA Funding
The FSA may be funded by employer contributions or by a pre-tax salary reduction agreement with each employee as that employee so elects at the start of each year. The employer must take the initiative to establish the FSAs; the employee cannot start one on his or her own. The employer as the plan sponsor also shoulders the incidental administrative costs of running the FSAs.
Salary reduction contributions must be capped at $3,200 per year for 2024. It is subject to increase per inflation index.
“Use-It or Lose-It Rule.”
Amounts withdrawn from an FSA must be used to reimburse medical care expenses. Any excess cash in the account at the end of the year not used for expenses incurred during that year will be forfeited. This is known as the "use-it or lose-it" rule. However, the IRS has given employers permission to modify FSAs in one of two ways.
Employers may amend their FSA plans to extend the deadline for up to 2 1/2 months after the end of the plan year. Or employers may allow up to a $640 carryover into the next year of any unused FSA funds. Any use-it or lose-it carryover into the next tax year, under either the 2 1/2-month extension or the $640 rule, does not count toward the annual cap on health FSA contributions for that next year.
If you have any questions about health FSAs, please contact us.
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