Flexible Spending Accounts

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What is a “Flexible Spending Account”?

According to the IRS, “Flexible Spending Accounts provide employees a way to use tax-free dollars to pay medical expenses not covered by other health plans.” Employers are not required to offer flexible spending accounts (“FSA”). THe advantage of these accounts to employees is that amounts contributed by the employee from his/her/their compensation are not subject to federal income tax, Social Security tax or Medicare tax. If the plan allows, the employer may also contribute to an employee’s FSA. 

Employees who contribute money from his/her/their compensation into the account may use the money to reimburse the employee throughout the plan year for certain health care expenses that are not covered by other insurance plans. Typcial expenses that are covered by FSA include co-pays and deductibles. The IRS sets a maximum amount that an employee may deposit into the FSA tax-free. Employees generally must use their full set-aside amount during the plan year but some plans allow for a $500 carry over period to use in the following year.

  • Not all medical expenses are eligible. See this list of generally permitted medical and dental expenses covered by FSAs.
  • Nonprofit employers may elect to set up a FSA account for employees. These accounts are administered by an outside administrator, usually a firm that specializes in employee benefit plans.

What do nonprofits need to know?

Before the start of each plan year, every nonprofit employer with a FSA needs to remind employees participating in a FSA to elect how much in total to contribute through payroll deductions. Under the use or lose provision, participating employees often must incur eligible expenses by the end of the plan year, or forfeit any unspent amounts. But under a special rule, employers may, if they choose, offer participating employees more time through either the carryover option or the grace period option.

Under the carryover option, an employee can carry over up to $500 of unused funds to the following plan year. Employers can offer either option, but not both, or none at all.

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