Everything You Need to Know About Health FSAs

What is a Health FSA?

Health FSAs offer tax advantages for both the employee and the employer.

A health flexible spending account (FSA) allows employees to pay for qualified out-of-pocket medical expenses on a pre-tax basis. The funds are deducted from the employee’s paycheck and are held in an FSA account. These funds are not subject to payroll taxes, resulting in substantial payroll tax savings for the employer as well as the employee.

What types of expenses are covered by the Health FSA?

The list of Health FSA qualified medical expenses is quite extensive and ranges all the way from hearing aids to hospital bills. Even certain over-the-counter products such as cough drops and nasal sprays are often eligible. In 2021, COVID-19 related home testing kits and some personal protective equipment (PPE) products were added to the list of eligible expenses and in 2020, the purchase of certain over-the counter-medications and menstrual care products also became eligible.

The IRS defines qualified medical expenses as amounts paid for the “diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body.” Keep in mind that qualified medical expenses are only eligible for reimbursement through an FSA as long as they are not reimbursed through insurance or any other source.

How much can I contribute to my Health FSA?

Employers decide the maximum amount their employees are permitted to contribute to the Health FSA. For both 2021 and 2022, the maximum contribution allowed by the IRS is $2750.

What if I don’t use all of my FSA funds by the end of the year?

That really depends on how each employer has set up the FSA. Some FSAs are “use it or lose it,” some have a specified roll-over amount for a limited time period, and some have a grace period that allow you to make claims under certain circumstances after the plan year ends.

That’s why it is important to understand your particular plans parameters and to carefully estimate how much you are likely to spend on eligible healthcare expenses when you make your annual election.

What happens to the funds if an employee leaves or is terminated?

You are eligible to submit claims or expenses that were incurred prior to your last day of employment. There is a limited time to do so.

Can a domestic partner’s medical expenses be reimbursed?

When it comes to being reimbursed for the medical expenses of a domestic partner via a Health FSA, it’s important to pay close attention to the requirements. Not all domestic partners are eligible since certain criteria must be met and followed.

Medical expenses of a domestic partner who is a tax dependent of the employee are eligible for tax-free reimbursement from the employee’s health FSA. Medical expenses for a domestic partner who is not the employee’s tax dependent are not eligible for tax-free reimbursement from the employee’s health FSA, even if the employer offers domestic partner health insurance benefits. It’s best to speak to a trusted tax advisor about your particular situation.

What is an itemized provider receipt and why do I need one to file a claim?

An itemized receipt is used to help prove the eligibility of the expense. The receipt should contain the name of the patient, the name of the provider, the date(s) of service, a description of service and the amount the patient was responsible for.

Can I submit an expense to both my FSA and HRA or HSA?

NO. That answer is worth repeating, NO!

Learn More About Health FSAs with benefEx

Whether you have questions regarding tax advantages or other aspects of Health FSAs, we can help. Contact benefEx today to learn more!