As many employers have discovered, health flexible spending accounts (FSA) are a great benefits solution. A health FSA is an employer-sponsored account that employees can use to pay for (or reimburse themselves for) qualifying medical expenses on a tax-free basis. Unlike a health savings account (HSA), employees do not need to be covered by a high-deductible health plan (HDHP) in order to participate in a health FSA. Health FSAs can be offered with any other type of health plan.
Both employers and employees can make health FSA contributions, in contrast to a health reimbursement arrangement (HRA) where only the employer is allowed to make contributions. Employees may contribute pre-tax dollars to their health FSAs through a Section 125 plan (or cafeteria plan). Employers do not pay FICA or unemployment taxes on employees’ health FSA contributions.
Often, employers will set a maximum annual amount that employees may contribute to their health FSAs. Effective for plan years beginning on or after January 1, 2013, the Affordable Care Act (ACA) limits employees’ pre-tax health FSA contributions each year. Employers may continue to impose limits on employee health FSA contributions, as long as the employer’s limit does not exceed the ACA’s maximum limit. For plan years beginning in 2021, the dollar limitation on employee salary reduction contributions to a health FSA is $2,750.
Employees may use their health FSAs to pay for (or reimburse themselves for) their own qualifying medical expenses, as well as their spouses’ and dependents’ qualifying medical expenses. Qualifying medical expenses are unreimbursed medical care expenses, as defined under Section 213(d) of the Internal Revenue Code. An employer may more narrowly define the expenses that can be reimbursed from an employee’s health FSA. Unlike HSAs, health FSAs cannot be used to pay for non-medical expenses.
For more information about FSAs, contact the Association’s HR Services team at 814/833-3200, 800/815-2660 or hrservices@mbausa.org.
