What is Healthcare FSA?

What is Healthcare FSA – Overview

A Healthcare Flexible Spending Account is called FSA. It is an employer-sponsored and employee-funded savings account that an employee can use to cover eligible healthcare expenses. The contributions made by the employer and employee towards FSA are un-taxed, which also helps to make significant tax savings for the employee and employer alike.

Usually, employees end up forfeiting their unused FSA funds at the beginning of a new year or when they resign from the company.

In this article, we shall take a detailed look at Healthcare FSA, which is helpful to know for employers and employees when offering or negotiating terms of employment before new hiring.

What is a Healthcare Flexible Spending Account?

You can choose between two main types of flexible spending accounts. These are the healthcare FSA and the dependent care FSA. The latter is called the DCAP, short for the dependent care assistance program.

A healthcare FSA is employer-owned savings account that an employee contributes to with an untaxed amount. The employee has access to their healthcare FSA to coverage eligible dental, vision, and other healthcare expenses. The employee can use the healthcare FSA fund to cover the cost of treatment for themselves, their spouse, and any eligible dependent.

On the other hand, a DCAP is also a tax-free savings account. However, the dependent care assistance program is more focused on providing coverage to employees for child care related expenses.

Per regulations, an individual employee can contribute around US$ 2,750 per year towards their healthcare FSA, usually from pre-tax income. Generally, the unspent amount in an employee’s FSA account is forfeited at the end of the plan year unless otherwise specified by the employer.

Additionally, employers can allow employees to add around US$ 550 of unused funds or grant a 2.5-month-long grace period to spend the unused funds at the beginning of a new plan year. Besides this, if an employee chooses to leave for any reason, they usually lose their accumulated FSA funds unless they are also eligible for COBRA continuation coverage.

How Does the Healthcare FSA Work?

What Is Healthcare FSA – How Does the Healthcare FSA Work

A healthcare FSA is the accumulated fund made from contributions of employers and employees. Both can use pre-tax income to contribute towards healthcare FSA. The employer can use this fund to cover the expenses of eligible healthcare procedures. This is mostly done through a debit card which is connected to the employee’s healthcare FSA account.

To be eligible for a healthcare FSA, an employee must be offered a conventional group healthcare insurance plan and establish a Section 125 Cafeteria Plan by the employer. This rule dictates the way a healthcare FSA works.

Here’s a short breakdown of how a healthcare FSA works:

1 – Employees Choose Their Contribution Amount

Employees have the liberty to choose an FSA annual contribution limit before the beginning of a 12-month plan year. This contribution amount should be chosen carefully, as the employee will not be able to change the committed amount during the current plan year unless in case of a special event, such as marriage, childbirth, or adoption expenses.

2 – The Contribution Amount Is Deducted Directly From the Paycheck

The chosen contribution amount is deducted from the employee’s pre-tax income and is equal installments throughout the plan year.

3 – Fsa Funds Can Be Used for Eligible Expenses

The claims for FSA coverage are paid directly into the employee’s annual contribution amount, even when the employee has not contributed the full amount. This is possible because of the “uniform coverage rule.”

4 – Unused Fsa Funds Are Rolled Over to the Next Year or Forfeited

Depending on the employer’s terms of employment, the unused FSA funds can be forfeited or rolled over to the next year. This is known as the “use or loses” rule. However, some employers may even offer a grace period to employees at the beginning of a new plan year to carry over provisions that can help soften the impact.

5 – Employees Forfeit FSA Funds on Termination of Employment

The IRS rules relating to cafeteria plans and Department of Labor rules concerning group health insurance plans apply to FSA funds too. This includes requiring plan documents, COBRA administration, and nondiscrimination tests. So, employees who resign or are fired from employment lose access to any remaining FSA balance, unlike pension schemes. This is true unless the former employee is eligible for COBRA and continues contributing to their healthcare FSA.

What Are the Expenses Covered by Healthcare FSA?

Healthcare FSA funds are normally meant to cover the cost of medical, vision or dental care, which are not covered by health insurance policies. Besides this, healthcare FSA funds can also be used to cover several other expenses, treatments, and benefits.

For instance, healthcare FSA funds can be used to pay for, or reimburse, over-the-counter and prescription medicines, vaccines, dental implants, corrective lenses, acupuncture treatments, and more.

An employee with a healthcare FSA is entitled to use the entire amount as soon as the plan year starts, even though they have yet to make a committed contribution at that stage.

Conclusion

A healthcare flexible spending account (FSA) helps in tax savings for employees. These funds also allow you peace of mind as they can be readily accessed to pay for eligible claims, even before making the full contribution. A healthcare FSA account is an excellent safety net for covering non-insurance-covered medical expenses.

References

https://www.healthinsurance.org/glossary/medical-flexible-spending-account/

https://www.optum.com/library/health-finances/page.hub.what-is-health-care-fsa.html

https://www.healthcare.gov/have-job-based-coverage/flexible-spending-accounts/

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