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Taxmap/pubs/p969-002.htm#TXMP52380271 Flexible Spending Arrangements (FSAs)

Cafeteria plan

A health flexible spending arrangement (FSA) allows employees to be reimbursed for medical expenses. FSAs are usually funded through voluntary salary reduction agreements with your employer. No employment or federal income taxes are deducted from your contribution. The employer may also contribute.

For information on the interaction between a health FSA and an HSA, see Other employee health plans under Qualifying for an HSA, earlier.

Taxmap/pubs/p969-002.htm#TXMP7611940e What are the benefits of an FSA?

You may enjoy several benefits from having an FSA.

• Contributions made by your employer can be excluded from your gross income.
• No employment or federal income taxes are deducted from the contributions.
• Withdrawals may be tax free if you pay qualified medical expenses. See Qualified medical expenses, later.
• You can withdraw funds from the account to pay qualified medical expenses even if you have not yet placed the funds in the account.

Taxmap/pubs/p969-002.htm#TXMP1ea73df7 Qualifying for an FSA

Health FSAs are employer-established benefit plans. These may be offered in conjunction with other employer-provided benefits as part of a cafeteria plan. Employers have complete flexibility to offer various combinations of benefits in designing their plan. You do not have to be covered under any other health care plan to participate.

Self-employed persons are not eligible for an FSA.

Certain limitations may apply if you are a highly compensated participant or a key employee.

Taxmap/pubs/p969-002.htm#TXMP6898fca9 Contributions to an FSA

Contributions to an FSA

You contribute to your FSA by electing an amount to be voluntarily withheld from your pay by your employer. This is sometimes called a salary reduction agreement. The employer may also contribute to your FSA if specified in the plan.

You do not pay federal income tax or employment taxes on the salary you contribute or the amounts your employer contributes to the FSA. However, contributions made by your employer to provide coverage for long-term care insurance must be included in income.

Taxmap/pubs/p969-002.htm#TXMP3979972c When To Contribute

At the beginning of the plan year, you must designate how much you want to contribute. Then, your employer will deduct amounts periodically (generally, every payday) in accordance with your annual election. You can change or revoke your election only if there is a change in your employment or family status that is specified by the plan.

Taxmap/pubs/p969-002.htm#TXMP75043512 Amount of Contribution

Amount of Contribution

There is no limit on the amount of money you or your employer can contribute to the accounts; however, the plan must prescribe either a maximum dollar amount or maximum percentage of compensation that can be contributed to your health FSA.

Contributed amounts that are not spent by the end the plan year are forfeited. See Balance in an FSA, later. For this reason, it is important to base your contribution on an estimate of the qualifying expenses you will have during the year.

Taxmap/pubs/p969-002.htm#TXMP0f8734ca Distributions From an FSA

Distributions From an FSA

Distributions from a health FSA must be paid only to reimburse you for qualified medical expenses you incurred during the period of coverage. You must be able to receive the maximum amount of reimbursement (the amount you have elected to contribute for the year) at any time during the coverage period, regardless of the amount you have actually contributed. The maximum amount you can receive tax free is the total amount you elected to contribute to the health FSA for the year.

You must provide the health FSA with a written statement from an independent third party stating that the medical expense has been incurred and the amount of the expense. You must also provide a written statement that the expense has not been paid or reimbursed under any other health plan coverage. The FSA cannot make advance reimbursements of future or projected expenses.

Taxmap/pubs/p969-002.htm#TXMP0a0e3e65 Qualified medical expenses.

Qualified medical expenses are those specified in the plan that would generally qualify for the medical and dental expenses deduction. These are explained in Publication 502, Medical and Dental Expenses. Examples include amounts paid for doctors' fees, prescription and non-prescription medicines, and necessary hospital services not paid for by insurance.

You cannot receive distributions from your FSA for the following expenses.

• Amounts paid for health insurance premiums.
• Amounts paid for long-term care coverage or expenses.
• Amounts that are covered under another health plan.

If you are covered under both a health FSA and an HRA, see Notice 2002-45, Part V, which is on page 93 of Internal Revenue Bulletin 2002-28 at www.irs.gov/pub/irs-irbs/irb02–28.pdf.

You cannot deduct qualified medical expenses as an itemized deduction on Schedule A (Form 1040) that are equal to the distribution you receive from the FSA.

Taxmap/pubs/p969-002.htm#TXMP1f01b4bf Balance in an FSA

Flexible spending accounts are "use-it-or-lose-it " plans. This means that amounts in the account at the end of the plan year cannot be carried over to the next year. Your employer is not permitted to refund any part of the balance to you.

Taxmap/pubs/p969-002.htm#TXMP52d348b8 Employer Participation

Employer Participation

For the health FSA to maintain tax-qualified status, employers must comply with certain requirements that apply to cafeteria plans. For example, there are restrictions for plans that cover highly compensated employees and key employees. The plans must also comply with rules applicable to other accident and health plans. Chapters 1 and 2 of Publication 15-B, Employer's Tax Guide to Fringe Benefits, explain these requirements.

Previous Page:  Publication 969 - Medical Savings Accounts - Medical Savings Accounts (MSAs) Next Page:  Publication 969 - Medical Savings Accounts - Health Reimbursement Arrangements (HRAs) Use     to find additional instances of index items.