Article Highlights:
- Health Flexible Spending Arrangement (FSA)
- Benefits of an FSA
- Qualifying for an FSA
- Contributions to an FSA
- Amount of Contribution
- Distributions From an FSA
- Qualified Care Expenses
- Qualified Medical Expenses
- Use-It-or-Lose-It
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 federal income tax or employment (Social Security and Medicare) taxes are deducted from your contribution and the employer may also contribute. Generally, you must designate how much you want to contribute at the beginning of the plan year. Unfortunately, self-employed persons aren't eligible for FSAs, and employers aren't required to sponsor FSAs.
Unlike contributions to and distributions from HSAs that must be reported on your Form 1040, there are no income tax return reporting requirements for FSAs.
Benefits of an FSA
Employees may enjoy several benefits from having an FSA.
- Contributions made by the employer can be excluded from the employee's gross income.
- Contributions made by the employee are excluded from the employee's gross income.
- No employment or federal income taxes are deducted from the contributions.
- Reimbursements are tax free if paid for qualified medical expenses, which includes many over-the-counter items.
- The maximum employee contribution for 2024 is $3,200.
Qualifying for an FSA
Health FSAs are employer-established benefit plans. These may be offered in conjunction with other employer-provided benefits as part of a cafeteria plan. Employers have flexibility to offer various combinations of benefits in designing their plans.
Contributions to an FSA
You contribute to your FSA by, at the beginning of the plan's year, 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.
Amount of Contribution
For 2024, salary reduction contributions to a health FSA can't be more than $3,200 a year (or any lower amount set by the plan). This amount is indexed for inflation and may change from year to year.
Generally, contributed amounts that aren't spent by the end of the plan year are forfeited (to the employer). However, there are possible exceptions. For this reason, it is important to base your contribution on a reasonable estimate of the qualifying health care expenses you expect to 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 and documented by a third party. You must be able to receive the maximum amount of reimbursement, and the maximum amount you can receive tax free is the total amount you elected to contribute to the health FSA for the year.
Some employers provide debit cards, credit cards, and stored value cards to 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.
Qualified Care Expenses
Qualified medical expenses are those specified in the plan that would generally qualify for the Schedule A medical and dental expenses itemized deduction.
Qualified medical expenses are those incurred by the following persons.
1. The employee and employee's spouse.
2. All dependents the employee claims on the employee's tax return.
3. Any person you could have claimed as a dependent on the employee's return except that:
- The person filed a joint return.
- The person had gross income of $5,050 or more (this number is annually adjusted for inflation and was $4,700 in 2023); or
- The employee, or spouse if filing jointly, could be claimed as a dependent on someone else's tax return for the tax year.
4. Your child under age 27 at the end of your tax year.
FSA plan participants can't receive distributions from their 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.
Qualified Medical Expenses
Before enrollment (if an employer offers an FSA), review any expected health care expenses projected for the year. Participating employees should plan for healthcare activities when they calculate their contribution amounts. Consider:
- Updating your medicine cabinet with necessary supplies.
- Big ticket expenses.
- Seasonal needs such as allergy products, sunscreen, or warm steam vaporizers.
- Routine checkups or visits with specialists that regular insurance plans do not cover.
- Medical co-pays.
- Medical transportation costs
- Prescribed medications and Rx co-pays.
- Many over-the-counter items that are FSA eligible.
- Menstrual care products are considered medical care and are a covered expense.
- Eye exams or dental visits: Out-of-pocket costs for dental and vision care are also covered by an FSA.
For a more detailed list of qualified medical expenses click here.
Here are online sites that sell FSA qualified expenses, that will give an idea of the over-the-counter products that qualify as medical expenses.
Amazon Flex Spending Approved items
Use-It-or-Lose-It
FSAs are generally "use-it-or-lose-it" plans. This means that amounts in the account at the end of the plan year can't generally be carried over to the next year. However, the plan can provide for either a grace period or a carryover.
The plan may allow a grace period of up to 2 1/2 months after the end of the plan year, during which time any qualified medical expenses incurred in that period can be paid from any amounts left in the account at the end of the previous year. Your employer isn't permitted to refund any part of the balance to you.
Plans may allow up to $640 for 2024 (this amount is annually adjusted for inflation and was $610 in 2023) of unused amounts remaining at the end of the plan year to be paid or reimbursed for qualified medical expenses you incur in the following plan year. The plan may specify a lower dollar amount as the maximum carryover amount. If the plan permits a carryover, any unused amounts more than the carryover amount are forfeited. The carryover doesn't affect the maximum amount of salary reduction contributions that you are permitted to make.
A plan may allow either the grace period or a carryover, but it may not allow both.
If you have questions related to Health Flexible Spending Arrangements and how one can fit into your tax planning, please contact this office.
