Flexible Spending Accounts

What is a Flexible Spending Account (FSA)?

A Flexible Spending Account (FSA) provides a tax-advantaged way to pay for eligible out-of-pocket healthcare expenses and work-related dependent day care expenses. Authorized by Internal Revenue Code Section 125, an FSA allows you to pay for eligible expenses with “pre-tax” dollars, thereby lowering your taxable income. Employers have the option of offering a healthcare spending account, a dependent day care account or both.

A healthcare spending account allows you to set aside money on a pre-tax basis to pay for qualifying out-of-pocket health care, dental, vision or hearing expenses. Out-of-pocket expenses are those that are not covered by your existing insurance plans. These expenses include deductibles, coinsurance and co-pays and certain over-the-counter (OTC) expenses.

A dependent day care spending account allows you to set aside money on a pre-tax basis to pay for child or adult day care expenses so that you and , if married, your spouse can work. These expenses include day care, before-and-after school programs, nursery school or preschool, summer day camp and even adult day care.

What is the main advantage of enrolling in an FSA?

The main advantage of an FSA is that you do not pay federal income taxes or social security taxes on the amount you elect to contribute to your FSA. In most states, you don’t pay state taxes on your contribution either. By participating in an FSA, you lower your taxable income and therefore decrease the amount of taxes you pay.

How does an FSA work?

To begin, you decide if you want to participate in a healthcare and/or dependent day care account. Then, you would:

  • Estimate the amount you will spend on out-of-pocket health expenses and/or dependent care expenses during the plan year.

  • Decide how much you wish to set aside into your Healthcare account and/or your Dependent Day Care account. (Be conservative, review your prior year’s expenses and plan only for predictable costs).

The amount(s) you wish to set aside is deducted from your paycheck (on a pre-tax basis) in equal amounts each pay period. As you incur healthcare and/or dependent day care expenses throughout the year, you can access your funds by submitting an online claim for eligible expenses and get reimbursement for your out-of-pocket expenses.

If I elect to participate in the healthcare and/or dependent day care account, how long will my election be in effect?

Your election will be in effect until the end of the plan year. You must re-enroll each year if you want to continue participating. You may only start, stop, or change your contribution amount during the plan year if you have a qualifying event in your family situation, such as marriage, divorce or the birth of a child.

Can I change my election during the plan year? 

Since these plans are governed by the IRS, there are specific rules you need to be aware of. The IRS requires that you make your election decision before the new plan year begins each year, or before your effective date if you are newly eligible. The election decision remains in effect for the plan year, unless you have Qualifying Life Event or status change, such as a marriage, birth, death of a dependent, etc. (Please see your employer plan provisions).

How do I get reimbursed?

As you incur healthcare and/or dependent day care expenses throughout the year, you can access your funds by submitting a claim online using PeopleSoft to get reimbursed for your out-of-pocket expenses.

What happens to the funds left in my account at the end of the plan year?

Any funds left in your account at the end of the year are forfeited. However, you may file claims from the previous year, with dates of service January 1 through December 31, through the end of the first quarter of the New Year, i.e. March 31. You can avoid forfeitures if you plan carefully by reviewing your prior year’s out-of-pocket expenses to estimate what you will spend in the next year, and also make sure to be conservative and plan only for predictable expenses.

Does enrollment in an FSA affect my other benefits?

Typically, it does not affect your other benefits since most employer sponsored benefits, such as life insurance or disability income, are based on your gross salary prior to any salary reductions. However, you are saving on social security taxes so your social security retirement may be minimally impacted.

Do I have to be enrolled in VSU’s medical or dental plan in order to participate in an FSA?

Enrollment in other group plan(s) is not required in order to participate in an FSA.

I elected to contribute $100 per month or $1,200 for the calendar year into a healthcare FSA.  If I have $100 in my account in January, but incur a $300 expense, how much can I be reimbursed?

Your healthcare FSA will reimburse you the full $300.  With a healthcare FSA, you are eligible to receive up to your election amount beginning the first day of your plan year.  In other words, you do not need to have contributed your full election in order to use your full election amount.

Will I need to submit any additional information to substantiate an expense being claimed for a medically necessary treatment?

In some cases, you will be asked to provide a “letter of medical necessity” from your physician to substantiate your claim.  Treatments such as massage therapy or weight loss programs that can be for both medical and non-medical reasons may be subject to this requirement.  Each claim will be reviewed and you will receive an explanation of the denied claim or a request for additional information required prior to the reimbursement of the claim.

If my spouse and I are employed by the same employer, can we claim each other’s expenses on our respective accounts?

You can either claim your spouses expenses on your healthcare FSA or your spouse can claim your expenses on his/her healthcare FSA.  You both cannot file for the same expenses under both accounts.  In other words, you cannot “double-dip”.

Are over-the-counter medicines and drugs eligible expenses?

Over-the-counter (OTC) medicines and drugs that are taken orally or applied to the body to alleviate or treat sickness, pain, injuries, or a medical condition such as allergy and cold medications, pain relievers such as aspirin and antacids, are eligible for reimbursement.  A physicians written prescription is required for over-the-counter medicines. Items such as vitamins, herbal and dietary supplements, cosmetic treatments or items that are for maintaining general good health are not eligible expenses.

Is there a limit to the amount of over-the- counter (OTC) drugs I may submit for reimbursement?

Yes.  The quantity of over-the-counter drugs purchased and submitted for reimbursement must be reasonably able to be consumed during the current plan year.  “Stock piling of drugs and medicines in anticipation of a medical condition or at the end of the plan year would be an ineligible request”.

If I have to travel out of state for healthcare services, are my travel expenses eligible?

Travel expenses may be eligible for reimbursement if primarily for and essential to medical treatment.  You can refer to IRS publication 502. 

Is corrective eye surgery (LASIK, Radial Keratotomy) eligible for reimbursement?

Yes, corrective eye surgery is an eligible expense.  Be sure you are a candidate for the surgery before funding your account.  If you find out you cannot have the surgery and you have contributed money into your FSA for the surgery, the IRS will not allow you to reduce your election. 

Are dental veneers or teeth whitening eligible expenses?

No.  Dental veneers and teeth whitening are generally considered cosmetic treatments and are therefore, ineligible expenses.

Can I pay my spouse’s health insurance premiums through my Healthcare Flexible spending Account (FSA)?

Although allowed as a medical deduction for individual taxpayers on their personal income tax returns, insurance premiums are not an eligible expense under IRS Section 125 Healthcare Flexible Spending Accounts (FSAs).

What happens to my account upon termination of employment?

Your eligibility to incur expenses ends when you terminate employment.