A health flexible spending account provides employees the ability to use tax-free dollars to pay medical expenses not covered by health insurance. An employee who participates in a health FSA can contribute up to $2,650 during the 2018 plan year without the amount being subject to federal income tax, Social Security tax or Medicare Tax. The maximum contribution amount may be lower based on plan design.
During the plan year, employees use funds contributed to the FSA to pay for qualified medical expenses not covered by insurance, such as co-pays, deductibles, dental expenses, and vision care. As a condition of offering the pre-tax contributions, the IRS places restrictions on the structure of FSAs. One such restriction is that a health FSA cannot operate in a manner that allows employees to defer compensation.
Because of the prohibition on deferred compensation, FSAs must follow the “use it or lose it rule.” This means that health FSA contributions that have not been used to reimburse expenses incurred during the plan year cannot be carried over into a subsequent plan year and must be forfeited. There is a limited exception for a “grace period” and a “carryover.”
The carryover exception allows a plan to be structured to allow carryovers of up to $500 at the end of a plan year to be used for qualified medical expenses incurred in a subsequent plan year. Another exception allows plans to provide a 2-1/2 month grace period following the plan year during which time participants may access unused amounts from the prior plan year to pay expenses incurred during the grace period.
A health FSA may have a carryover or a grace period, but not both.
BAS offers FSA claims administration services for health FSAs with either a grace period or a carryover. For more information on BAS flexible spending account administration, contract your account manager or solutions@BASusa.com.
