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Basic Rules of FSAs

Here are some of the basic rules for flexible spending accounts:

• An employee must choose how much to put in the account at the beginning of the year (although all of the money does not have to be contributed at the beginning of the year).
• The account may not establish a premium payment schedule based on the rate or amount of claims incurred.
• The entire amount the employee has elected to contribute for health care expenses (less any amounts previously reimbursed) must be available at all times to reimburse expenses.
• Failure to pay premiums, however, will terminate flexible spending account coverage and any claims incurred after the date of termination will not be eligible for reimbursement.
• $5,000 is the maximum that an employee can contribute in a calendar year for a dependent care FSA.
• Some FSAs establish a minimum that must be met before a claim will be paid, such as $25 or $50.
• If there is a balance left in an individual employee's flexible spending account at the end of the year, generally, it is forfeited (known as the use-it-or-lose-it policy); forfeited funds may be used by the employer to offset future administrative expenses.
  

  Did You Know? Relief from the use-it-or-lose-it drawback of FSAs is available. According to a May 18, 2005, IRS notice, employers are permitted to modify their FSAs to extend the deadline for reimbursement of health and dependent care expenses up to 2-1/2 months after the end of the plan year. The tax laws generally prohibit deferring compensation by means of a cafeteria plan. A plan that permits employees to carry over unused elective contributions or plan benefits from one plan year to another is a form of deferred compensation; therefore, employee plans generally require that unused contributions or benefits remaining at the end of the plan year be forfeited under a "use it or lose it" provision. This rule is modified to provide that a cafeteria plan document may be amended to provide for a 2-1/2 month grace period immediately following the end of a plan year. Expenses for qualified benefits incurred during this grace period may be paid or reimbursed from benefits or contributions that were unused at the end of the plan year. Unused benefits or contributions relating to a particular qualified benefit may only be used to pay or reimburse expenses incurred with respect to that benefit; unused benefits or contributions may not be cashed out or converted to any other benefit. Any benefits remaining unused after this grace period will be forfeited under the "use it or lose it" rule as before.

• The plan administrator should allow 90 to 120 days after the end of the year for participants to submit claims.
• The plan need only pay claims that are incurred during the plan year; the administrative system you set up must be able to distinguish between claims made in one year for expenses in the previous year and claims made in one year for expenses in that same year.
• If someone who participates in the account is entitled to COBRA benefits, and that person elects to continue as an account participant, you would have to continue to honor the claims and accept the payments.