What are health care spending accounts?
Generally, a health care flexible spending account (FSA) is designed to pay an employee's medical and dental expenses in pre-tax dollars. The annual deductibles for the medical and dental portions of the employer-provided health care plan, as well as expenses not covered by the plan (e.g., eye examinations, glasses, hearing aids, and orthodontia), can be reimbursed from the health care FSA.
Benefits provided under health care FSAs are treated as excepted benefits
under HIPAA-see ¶42,410
.
Premiums for other health coverage. A health care spending account cannot be used to pay the premiums for other health care coverage, such as an individual health plan premium, Medicare premiums, or group health insurance premiums incurred by the employee's spouse. Although health care FSAs cannot be used to pay premiums for other health care coverage, premiums for current health plan coverage (including coverage under a health care FSA) may still be paid on a salary reduction basis through the ordinary operation of the cafeteria plan.
FSA insurance features. FSAs are required to incorporate features that are commonly associated with insurance arrangements, such as basic risk-shifting and risk-spreading characteristics.
Reimbursement for incurred medical expenses. Reimbursements under health care FSAs must be paid specifically to reimburse the participant for medical expenses incurred previously during the period of coverage. A health care FSA cannot operate under a cafeteria plan in a manner that enables participants to receive coverage only for periods for which the participants expect to incur medical expenses if such periods constitute less than a plan year.
A reimbursement is not paid specifically to reimburse the participant for medical expenses if the participant is entitled to these amounts in the form of cash or any other taxable or nontaxable benefit, including health care coverage for an additional period, without regard to whether the employee incurs medical expenses during the period. A health care FSA cannot qualify for tax-favored treatment if the effect of the reimbursement arrangement eliminates all, or substantially all, risk of loss to the employer maintaining the plan or to the other insurer.
Employers may wish to keep FSA participants informed of reimbursed expenses and account balances by issuing FSA status memos. This memo could also be used to remind participants of the deadline for submitting claims for the current year.
Availability of maximum reimbursement. The maximum amount of reimbursement elected by each participant must be available to the participant throughout the coverage period, subject to reduction for prior claims paid. The amount of the available reimbursement cannot be based on the amount of premiums paid by the individual at the time the claim is made, nor can an employer accelerate the premium payment schedule based upon claims.
Reimbursement will be deemed to be available at all times:
if it is paid at least monthly; or
when the total amount of the claims submitted is at least a specified minimum amount (e.g., $50).
If the employee revokes existing elections, the employer must reimburse the employee for any amount previously paid for coverage or benefits relating to the period after the date of the employee's separation from service, regardless of the employee's claims or reimbursements as of such date.
Employee Arnold Carter elects coverage under a health care FSA providing coverage of up to $300 in medical expenses, and the annual premium for a calendar year of coverage is $300. Arnold is permitted to pay the $300 premium through salary reductions of $25 per month throughout the coverage period. He must be eligible to receive the maximum amount of reimbursement of $300 at all times throughout the coverage period (reduced by prior reimbursements).
Thus, if Arnold incurs $250 of medical expenses in January, the full $250 must be available for reimbursement even though he has made only one premium payment. If Arnold incurs another $50 in health expenses in February, the remaining $50 of the $300 maximum must be available for reimbursement. The employer or plan may not provide for an acceleration of the required premium payments based on Arnold's incurred claims and reimbursements.
Employee Ernie Brock elects coverage under a health care FSA with a maximum reimbursement limit of $500 for a calendar year of coverage and is required to pay the $450 premium for such coverage in two equal $225 installments, one at the beginning of the period of coverage and the second installment by the beginning of the sixth month of coverage. Ernie incurs a $400 medical expense in February, and the FSA makes a $400 reimbursement to the employee in March. Ernie does not incur any additional medical expenses before the end of June, at which time he separates from service.
If Brock fails to make the second premium installment, his coverage under the FSA may be terminated as of the end of June so that medical expenses incurred after June are not covered. If Ernie pays the second premium installment, his coverage under the FSA must continue, so that additional medical expenses (up to the remaining $100) incurred before the end of December are covered.
Twelve-month period of coverage. A health care FSA must provide coverage for a period of 12 months, although there are exceptions for short first plan years or short plan years when the entire cafeteria plan year is being changed. Election changes to increase or decrease the level of coverage under a health care FSA during the 12-month period of coverage are not permitted. However, a cafeteria plan may permit participants to make health care FSA election changes if there is a change in the employee's status.
An employer may adopt a grace period
that could extend the term for reimbursement from 12 months up to 14 months and 15 days. See ¶42,345
for more information.
Employees who make the total premium payment for the 12-month period cannot be terminated from the health care FSA merely because they separate from service with the employer.
Ellen Nelson has elected a $300 calendar year health care FSA, with monthly premium payments of $25 during the 12-month period of coverage. She separates from the service of her employer at the end of June and ceases to make additional premium payments. The cafeteria plan may provide that the FSA's period of coverage does not extend beyond June if she does not continue to make the required premium payments. However, if Ellen makes the total premium payment for the 12-month period of coverage, the cafeteria plan may not terminate the FSA's period of coverage merely because she separated from service before the end of the coverage period.
Prohibited reimbursements. Reimbursements under health care FSAs must be paid specifically to reimburse medical expenses incurred during the coverage period. A health care FSA cannot reimburse participants for premiums for other health coverage. This includes premiums paid for health coverage maintained by the employer of the employee's spouse or dependent. A health care FSA cannot reimburse participants for expenses incurred for cosmetic surgery, unless it's needed to correct a deformity related to an injury, disease or congenital abnormality to meaningfully promote the proper function of the body, or to prevent or treat illness or disease. Thus, teeth-whitening procedures to improve appearance are not covered.
Typical health expenses eligible for reimbursement
The following are representative expenses eligible for flexible spending account reimbursement (specific eligible expenses will vary depending upon individual plan provisions):
Medical expenses
Deductible: $150-$500/person, $450-$1,500/family, depending on plan option selected.
Copayments: 10%-20% for PPO charges, 20%-30% for non-PPO charges, depending on plan option selected.
Charges not covered by health plan, but eligible for spending account reimbursement:
all charges in excess of reasonable and customary
charges;
charges for preexisting
conditions;
eye exams, eyeglasses, and contact lenses;
hearing exams, hearing aids, and other special equipment for the deaf;
physical exams and mammograms in excess of one per year;
pap smears in excess of two per year;
inpatient treatment of mental/nervous conditions in excess of 45 days per year;
outpatient treatment of mental/nervous conditions in excess of $50/visit and $1,750 per year;
medical expenses of a dependent who is not covered by the health plan (e.g., dependent parent);
special schooling for a child with mental or physical disabilities;
transportation (if it is primarily for and essential to medical care and substantiated by receipts);
in vitro fertilization and other fertility treatments;
extra cost of a private hospital room;
most private duty
nursing;
extended care facility in excess of 120 days/confinement;
home health care in excess of 120 visits/year;
hospice care in excess of $5,000/year;
chiropractic expenses beyond active treatment of injury;
guide dog expenses, extra cost of Braille books and magazines;
special equipment or modification of home or car;
fertility enhancement treatments such as in vitro fertilization or vasectomy reversal;
legal abortions;
laser eye surgery such as radial keratotomy;
weight loss programs if done at the direction of a doctor and done to treat an existing disease such as heart disease or obesity (however, the cost of diet food typically does not qualify);
smoking cessation programs and prescription drugs designed to alleviate nicotine withdrawal;
nonprescription equipment, supplies or diagnostic devices, such as bandages, crutches, thermometers or blood sugar test kits;
insulin;
breast reconstruction surgery after a mastectomy;
Can over-the-counter drugs be reimbursed through FSAs? Yes, the IRS and the Treasury Department reversed their long-standing position on this issue; they will now allow health FSAs and other employer-provided health plans to reimburse employees for substantiated over-the-counter drugs.
The ruling specifically permits reimbursement of over-the-counter medications, such as antacids, allergy medicines, pain relievers and cold medicines purchased without a doctor’s prescription. However, it specifically disallows reimbursement for dietary supplements, such as vitamins, that are merely taken for general good health.
In explaining the holding, the IRS clarified that the statutory exclusion for the reimbursement of employee health expenses is broader than the itemized deduction for medical expenses (which does not apply to nonprescription drugs).
Dental expenses
Deductible: $100/person, maximum of $300/family.
Copayments: 20% of remaining charges; max. $250/person if maximum benefit of $1,000 is paid.
Charges not covered by health plan, but eligible for spending account reimbursement:
orthodontia (health plan does provide limited coverage for cleft palate and TMJ);
all expenses in excess of reasonable and customary
charges;
any charges after payment of $1,000/year/person in benefits;
teeth cleaning in excess of two per year;
routine exams in excess of two per year;
fluoride treatments, dental sealants, and space maintainers for patients 19 years and older;
replacement of lost or stolen dentures; and
bitewing X-rays in excess of one per year; full mouth X-rays in excess of one every three years.
A health care flexible spending account may not be used to pay insurance, Medicare, or health maintenance organization (HMO) premiums for the employee or dependents. This exclusion includes premiums charged by the employee's spouse's employer for coverage under a group health plan.
A health care FSA cannot reimburse participants for expenses incurred for elective cosmetic surgery. However, reimbursement for cosmetic surgery necessary to improve a congenital abnormality or injury or necessary to restore a bodily function is allowed.
Long-term care insurance provided through an FSA loses its tax-favored status.
Debit cards. The IRS has ruled that medical expenses paid through employer-issued debit or credit cards or other electronic media are excludable from gross income (and therefore eligible for FSA reimbursement), as long as the employer has precautionary procedures in place for substantiating the claimed medical expenses after they are charged on the card.
See ¶42,351
for a discussion of how FSAs work with Health Reimbursement Arrangements (HRA).
<p>Generally, a health care flexible spending account (FSA) is designed to pay an employee's medical and dental expenses in pre-tax dollars.</p>
What are health care spending accounts?
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