Health FSA Basics
A Health Care Flexible Spending Account (HFSA) allows employees to set aside a portion of their salary, before-tax, to reimburse certain amounts paid for medical care. Participating in a Health Care Flexible Spending Account can help employees save money on taxes since the money set aside is not subject to federal income or Social Security tax.The annual HFSA contribution may not exceed $2,850 (for 2022, as indexed for inflation each year). Employers may further limit annual contribution amounts.
What are Eligible HFSA Expenses?
A health care FSA may only reimburse expenses related to medical care. An amount spent on general good health is not considered a medical expense. An expense is for medical care if it is incurred to diagnose, cure, mitigate, treat, or prevent disease or affect any structure or function of the body.
If an expense is not clearly for medical care, or if it has both a medical care and non-medical care purpose, a doctor must document, in writing, that it is medically necessary.
A health care FSA may not reimburse insurance premiums or expenses that are paid from other medical, dental or vision plan coverage.
Whose Expenses are Eligible for Reimbursement?
A medical expense must be incurred by an employee, the employee’s spouse, or the employee’s tax dependent for health coverage purposes in order for the expense to be reimbursed from a health care FSA.
Expenses of an employee’s child who has not attained age 27 as of the end of the employee’s taxable year may also be eligible for reimbursement.
How Does a Health Care FSA Work?
A health care FSA allows an employee to set aside dollars from their paycheck, before taxes are taken out, and these dollars may be used for medical care expenses.
To participate in a health care FSA, an employee must designate the total amount to be contributed for the plan year. A portion of the total contribution will be deducted from each paycheck received during the plan year. When an eligible medical expense is incurred, the employee must submit a claim and proper documentation in order to be reimbursed tax free for the expense. When deciding a contribution amount for the year, it is important for the employee to conservatively estimate the medical expenses that will be incurred within the plan year. According to IRS regulations, any money remaining in a health FSA at the end of the plan year will be forfeited.
A plan may, in certain circumstances, allow participants to carryover a certain amount of unused funds to be used in the next plan year before unused amounts are forfeited.
Alternatively, a plan may allow a participant to continue to incur claims during a grace period of up to 2-1/2 months into the next plan year before unused amounts are forfeited.
Rules to Remember
If a participant does not use the money contributed to the health care FSA for medical care expenses incurred during the plan year (and grace period, if applicable) the money is lost (except for the allowable carryover amount, if any).
Claims for reimbursement must be submitted in accordance with the timing set by the plan.
May Elections be Changed?
Because of the special tax advantages that a health care FSA provides, the IRS places restrictions on changing health care FSA elections mid-year.
Once an employee authorizes deposits to a health care FSA for the plan year, federal rules prohibit the employee from stopping or changing elections until the next plan year, unless there is a “Change of Status Event” recognized by the plan.
Examples of Change in Status Events
If money in a health FSA is not used for medical expenses incurred during the plan year (and grace period, if any), any remaining amount cannot be returned to the employee at the end of the plan year.
Examples of Eligible Expenses
This is a partial list, for illustrative purposes only. All medical expenses must be properly substantiated, consistent with IRS guidelines, in order to be reimbursed from a health care FSA and some plans limit the expenses that may be eligible for reimbursement.