1. Presented by Jaeger & Flynn Assoc., Inc.
All About FSAs
Presented by
Jaeger & Flynn Assoc., Inc.

2. FSA Overview
A flexible spending account (FSA) is a tax-free account that reimburses employees for medical or dependent care expenses.
FSAs are usually offered through a Section 125 (cafeteria) plan.

3. Types of FSAs
There are two types of FSAs, each with its own rules and limitations:
Health FSA
Dependent Care FSA
*Note: An employee can have both types, but they must be kept separate (funds from one cannot be used to reimburse the other type of expense).

4. Who is Eligible for an FSA?
Any employee is eligible to have a FSA, if his or her employer offers it.
For health FSAs, employees do not need to be covered by a high deductible health plan to be eligible (unlike HSAs).

5. Contributions Both the employer and employee can contribute to an FSA.
Employees contribute money via payroll deductions through a Section 125 (cafeteria) plan.
Employee designates how much to contribute for the year during enrollment.
Money is typically deducted in equal installments each pay period.
Employees cannot change their election during the year, unless there is a change in employment or family status.

6. Tax Treatment
Employee contributions are made pretax (no employment or federal income taxes are deducted).
Employer contributions are not subject to FICA tax or federal or state unemployment taxes.
Employer contributions are not included in the employee’s gross income.
Distributions are tax-free (must be used for qualified expenses).

7. When Are Funds Available?
Health FSA
Annual contribution amount is available at any time throughout the year, regardless of the amount actually in the account.
Dependent care FSA
Only the amount currently in the account is available for distribution at any given time.

8. Use it or Lose it
The employee owns the account, but funds are not carried over and are not portable.
Employees must use their funds or lose them at the end of the year.

9. Grace Period
Employers have the option to offer a grace period of up to 2½ months to use remaining FSA funds.
If this period is offered, employees can pay qualified expenses that are incurred through March 15 using FSA funds from the previous calendar year.

10. Health FSAs

11. Health FSA
A health FSA reimburses employees for medical and dental expenses.
Currently there is no contribution limit for a health FSA, other than the limit an employer may select.
Health care reform institutes an annual salary reduction contribution limit of $2,500 beginning in 2013 (will increase in future years to reflect cost-of-living increases).

12. Health FSA: Eligible Expenses
Health FSAs may reimburse qualified medical care expenses not covered by the health plan.
Substantiation is required from a third party to make sure expenses are eligible for reimbursement.
The IRS defines qualified medical expenses as those paid for the diagnosis, cure or treatment of a disease, and must be primarily to alleviate a physical or mental defect or illness. More information can be found at
Employers can also define “eligible medical expenses,” within the IRS guidelines.
A health FSA may also reimburse medical expenses for a spouse or dependent.

13. Health FSA: Eligible Expenses
Examples of eligible expenses include:
Deductible and copayments for group health and/or dental plan
Eye exams, eyeglasses and contact lenses
Hearing exams and hearing aids
Exams and treatments that exceed the annual frequency covered by the plan (example: physical exams in excess of one per year)
Prescription drugs
Medical equipment and supplies (such as crutches, bandages and diagnostic devices)
Insulin and blood sugar test kits

14. Health FSA: Ineligible Expenses
Examples of ineligible expenses include:
Over-the-counter drugs, unless accompanied with a prescription (insulin is an exception)
Premiums for independent insurance coverage or Medicare
Premiums for group health coverage under the spouse’s employer
Elective cosmetic surgery (unless to repair a congenital abnormality or injury or to restore bodily function)
An exception is breast reconstruction surgery following a mastectomy

15. Debit Cards
Many health FSAs provide debit cards for employees to use, rather than having to seek reimbursement after the fact.
The employee may need to provide a receipt to verify that an expense is eligible.

16. Debit Cards
If the card is used for a nonmedical expense or the employee cannot provide documentation when requested, the claim will be denied and employees will have to pay the amount out of their pocket.
Under health care reform, there are restrictions for how an employee may use an FSA debit card when purchasing over-the-counter drugs with a prescription. Visit for more information.

17. If an Employee Leaves
If an employee leaves or is terminated within the plan year, the health FSA is still available to him or her ONLY if COBRA is elected and contributions are continued.
However, the employee may not take the account with him/her – typically, it is only available through the end of that plan year when COBRA is elected.

18. Dependent Care FSAs

19. Dependent Care FSA
A dependent care FSA can pay for the care of dependent children under age 13 by a babysitter, day care center, or before-school or after-school program.
Care for a disabled spouse, parent or child is also eligible if the individual lives with the employee and cannot care for himself or herself.
Care must be provided to keep employee and spouse gainfully employed.
Care must be given during normal working hours (for example, babysitting on a weekend for recreational time is not allowed).

20. Dependent Care FSA
The annual contribution limit for a dependent care FSA is $5,000 ($2,500 for a married individual filing taxes separately), the employee’s earned income or the spouse’s earned income – whichever is lowest of the three.
Dependent care expenses cannot be reimbursed until they are actually incurred (which can be an issue when child care centers “pre-bill” for services).

21. Dependent Care FSA
Expenses must be substantiated by a third party to make sure they are eligible dependent care expenses.
Debit cards may be used for dependent care FSAs, but they are not as popular as health FSA debit cards.
Cannot be used until expense is incurred. This is a problem when child care centers pre-bill for services.
Not practical for nannies, babysitters or small child care providers without electronic payment systems.

22. Thanks for your attention!
More questions? Contact your Jaeger & Flynn Assoc., Inc. representative today.
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