All About FSAs
Presented by
Jaeger & Flynn Assoc., Inc.
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.
Types of FSAs
There are two types of
FSAs, each with its
own rules and
limitations:
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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).
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).
Contributions
Both the employer and employee can contribute
to an FSA.
Employees contribute money via payroll
deductions through a Section 125 (cafeteria)
plan.
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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.
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).
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
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Only the amount currently
in the account is available
for distribution at any
given time.
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.
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.
Health FSAs
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).
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
www.irs.gov.
Employers can also define “eligible medical
expenses,” within the IRS guidelines.
A health FSA may also reimburse medical expenses
for a spouse or dependent.
Health FSA: Eligible Expenses
Examples of eligible expenses include:
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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
Health FSA: Ineligible Expenses
Examples of ineligible expenses include:
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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
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.
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-thecounter drugs with a prescription. Visit
www.irs.gov for more information.
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.
Dependent Care FSAs
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).
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).
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.
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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.
Thanks for your
attention!
More questions? Contact your Jaeger &
Flynn Assoc., Inc. representative today.
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