End-of-year FSA expenses: An employer cheat sheet

Do your employees still have unspent funds in their flexible spending accounts (FSA)? Often, reminding employees what expenses their FSA funds can help mitigate this issue. Read this blog post to learn more.


The scenario is all too familiar for employers and human resource managers: The year ends, and employees still have unspent funds in their flexible spending accounts. Whether employees forget that the money in their FSAs must be used or it will be lost, or they simply aren’t aware of which expenses can be covered by FSA funds, their frustration at losing money often falls on the employer.

Reminding employees which expenses are eligible to be covered by an FSA can help mitigate headaches for employers and HR departments in the new year and shed light on lesser-known options for making the best use of remaining funds before the end of the plan year.

As a general rule, an eligible expense is any medical expense the health plan doesn’t cover. This includes things such as out-of-pocket costs, co-pays, co-insurance, hospital visits and prescription drugs. Employees also can apply their FSA funds to dental and vision expenses, which often are not covered in health insurance plans.

Some eligible expenses employees might not be aware of include flu shots, prescription sunglasses, sunscreen that is 30 SPF or higher, grooming for service dogs, acupuncture, arch supports and nutritional consultations. Employees can also use money from FSAs to cover pregnancy tests and prenatal vitamins, hearing aids, canes and wheelchairs. They can also use funds to cover personal trainer fees, as long as a letter of medical necessity accompanies the claim.

The IRS determines which expenses qualify for FSAs and maintains a list on its website. Most FSA administrators have lists on their websites as well. FSA-holders can either search for individual expenses or scroll through the list to see what opportunities they might be missing. But it’s a good idea for employers to provide those lists for employees.

In addition to reminding employees what types of expenses are eligible for coverage by FSA funds, employers should review if their plan has a grace period, runout or rollover. If so, employers should communicate the details with employees, as this can help them take full advantage of the time they have to incur expenses and submit receipts for reimbursement.

A grace period is the amount of time an FSA-holder has after the end of the plan year to spend unused funds or incur expenses. A typical grace period is up to 2.5 months after the plan year ends. A run out is the amount of time an FSA-holder has after the end of the plan year to submit claims for reimbursement. In this case, expenses must be incurred before the end of the plan year. An FSA rollover allows up to $500 to be carried over from one calendar year to the next.

Employees also might not be aware that they can use FSA funds on a medical dependent, whether that dependent is covered by the FSA holder's health plan or not. For instance, if an employee has a 24-year-old daughter not covered by the employer health plan who needs a co-pay for a doctor appointment covered, the employee can use their FSA.

Lastly, it’s also important to make it clear to employees the distinction between an FSA and a health savings account. While many of the same expenses are eligible for coverage by either an FSA or HSA, make sure to remind employees about a few key distinctions. An HSA is not “use it or lose it.” All funds roll into the new year and do not need to be used up before the end of the plan year. And for an employee to use his or her HSA to cover a dependent’s medical expenses, the dependent must be a tax dependent.

Helping employees make the best use of their FSA funds before the end of the year not only positions the employer as a hero for saving employees’ hard-earned money, but it inevitably saves the employer from a headache heading into 2019.

SOURCE: Peterson, M. (19 November 2018) "End-of-year FSA expenses: An employer cheat sheet" (Web Blog Post). Retrieved from https://www.benefitnews.com/opinion/end-of-year-fsa-expenses-an-employer-cheat-sheet?brief=00000152-14a5-d1cc-a5fa-7cff48fe0001


IRS rule allowing flexible spending account carry-overs has pros and cons for employers

Originally posted November 17, 2013  by Jerry Geisel on http://www.businessinsurance.com

Employers have a new option to reduce the likelihood that employees will forfeit contributions to their flexible spending accounts, but companies need to evaluate the pros and cons of the approach before deciding whether to adopt the new “carry-over” design.

The option, which the Internal Revenue Service and the Treasury Department announced last month, allows employees to carry over up to $500 in FSA contributions remaining at the end of a plan year to use in the next plan year.

That is an alternative to the modification of the 1984 IRS use-it-or-lose-it rule, which requires FSA participants to forfeit money remaining in their accounts at the end of a plan year. Under the 2005 modification, employers can establish “grace-period” FSAs that allow employees to roll over the entire unused account balance to pay for expenses incurred during the first 21/2 months of the next plan year before the money is forfeited.

Grace-period FSAs are used by more than 40% of employers that offer an FSA, according to consultant Aon Hewitt.

After a year of examining the issue, federal regulators approved the new carry-over approach. However, employers can use either grace-period or carry-over FSAs, but not both. Employers also can continue to offer standard FSAs in which unspent balances are forfeited at the end of a plan year.

The carry-over approach also does not affect the $2,500 limit on annual FSA contributions imposed by the 2010 health care reform law.

The carry-over approach will cut back on “wasteful year-end FSA health care spending by limiting the risk of forfeiture and, in turn, reducing the incentive to spend down as year-end approaches in order to avoid losing unused funds,” the Treasury Department said in a statement when it unveiled the alternative.

At least some employers are expected to adopt carry-over FSAs.

“We will see some movement” to the carry-over approach, said Nicole Wruck, a senior director and health and welfare practice leader with Aon Hewitt in Lincolnshire, Ill. “It seems like a win for many participants.”

“You won't have this rush to spend at the end of the year. Employees will be more careful about spending” FSA account balances, said Jody Dietel, chief compliance officer for WageWorks Inc., a San Mateo, Calif.-based FSA administrator.

“My best guess is that employers will feel this approach is an enhancement that employees will welcome,” said Michael Thompson, a principal with PricewaterhouseCoopers L.L.P. in New York.

But others say employees who anticipate major health care expenses early in a plan year, such as orthodontia, could be losers under a carry-over FSA approach.

Andy Anderson, a partner at law firm Morgan, Lewis & Bockius L.L.P. in Chicago, said with a grace-period FSA, an employee could roll over up to $2,500 and have up to $5,000 to pay major health care expenses early in the next plan year. By contrast, the employee would have a maximum of $3,000 to use in the next plan year under a carry-over FSA.

A potential disadvantage for employers in the carry-over FSA approach is that forfeitures on unused balances could decrease significantly. That could cost employers because many use forfeitures to offset administrative expenses incurred in offering FSA programs, experts say.

“There is likely to be less to offset expenses,” said Jay Savan, a partner with Mercer L.L.C. in Atlanta.

Pending additional regulatory guidance, several unknowns remain involving the interaction of carry-over FSAs and rules affecting contributions to health savings accounts.

Under IRS rules, contributions to HSAs are not allowed when employees are enrolled in general-purpose FSAs. However, when the IRS authorized grace-period FSAs, it said HSA contributions would be allowed during the grace period by converting to a limited-purpose FSA in which balances could be used only to pay for dental, vision and preventive care services.

While consultants say IRS officials have informally said that HSA contributions could be made for individuals with carry-over FSAs — so long as the FSA was amended to be limited purpose — there has been no official guidance.

“The current guidance does not address this, so employers need to tread carefully” said Rich Stover, a principal with Buck Consultants L.L.C. in Secaucus, N.J.


FSA use-it-or-lose-it rule changed!

Originally posted October 31, 2013 by Kathryn Mayer on http://www.benefitspro.com

Use-it-or-lose-it is no more.

The U.S. Department of the Treasury and the IRS on Thursday issued a notice modifying the longstanding “use-or-lose” rule for health flexible spending arrangements. Participants now can carry over up to $500 of their unused balances remaining at the end of a plan year.

The rule will go into effect for the 2014 plan year.

Effective immediately, employers that offer FSAs that don't include a grace period will have the option of allowing employees to roll over up to $500 of unused funds at the end of this plan year.

An employer cannot offer a FSA carryover provision and an FSA grace period at the same time, officials said.

For nearly 30 years, employees eligible for FSAs have been subject to the use-it-or-lose-it rule, meaning any account balances remaining unused at the end of the year are forfeited.

FSAs allow employees to contribute pre-tax dollars to pay for out-of-pocket health care expenses – including deductibles, copayments, and other qualified medical, dental or vision expenses not covered by the individual’s health insurance plan.

Health savings accounts, on the other hand, are similar vehicles, but allow participants to build up savings over time.

The move, the departments announced, is making “FSAs more consumer-friendly and provide added flexibility.”

“Across the administration, we’re always looking for ways to provide added flexibility and commonsense solutions to how people pay for their health care,” Treasury Secretary Jacob Lew said in a statement. “Today’s announcement is a step forward for hardworking Americans who wisely plan for health care expenses for the coming year.”

The change responds directly to more than 1,000 public comments the Treasury fielded. Employers and employees complained about the difficulty for employees to predict future needs for medical expenditures. Many FSA users said they scrambled at year end to spend the remaining amounts, often buying unnecessary medical supplies.

IRS officials said they believe a $500 rollover cap is appropriate because most employees who lost money under the rule lost far less than that amount.

Bob Natt, executive chairman of Alegeus Technologies, a health and benefits payments firm, said he’s grateful the administration has “eliminated the most significant barrier to FSA participation – namely consumers’ fear of losing their money.”

He said that though more than 85 percent of large employers offer FSAs, only about 20 percent of eligible employees actually enroll, mainly for “fear of forfeiting unused funds at the end of the plan year.”

“With this new provision in effect, there is really no reason for eligible employees not to enroll and contribute to an FSA," Natt said. "All contributions are tax-free, the employee’s full election is available on the first day of the plan year, and now unused funds up to $500 can be rolled over to the next plan year.”

Alegeus Technologies has been lobbying for four years to modify the use-it-or-lose-it provision, he said.

Wageworks, a benefits management provider of consumer-directed benefits, has also been pushing the administration for flexibility on FSA provisions. The company's CEO, Joe Jackson, said it's a very "positive change" and a long time coming.

"The timing of this change could not be better, as most companies are now in their open enrollment period," Jackson said. "We encourage all eligible employees to take advantage of this change and sign up for an FSA and lower their health care expenses.”

The rule will have far-reaching effects: An estimated 14 million families participate in FSAs.

Under the Patient Protection and Affordable Care Act, the amount an employee can set aside in an FSA dropped to $2,500 this year. The $500 carryover won’t reduce the $2,500 maximum a worker can contribute to a FSA each year, Treasury officials said.


Benefits at the edge of the fiscal cliff - 4 areas to watch

Source: eba.benefitnews.com

As congressional leaders and President Obama attempt to hammer out a deal to prevent the nation from going over the “fiscal cliff” — a series of tax hikes for individuals and businesses that economists say could imperil the fragile recovery — HR/benefits professionals can prepare now, write benefit attorneys Diane Morgenthaler and Ruth Wimer, partners at law firm McDermott Will & Emery. Just in case we go over the “fiscal cliff,” Morganthaler and Wimer’s report outlines four benefit and payroll areas that should be top of mind for practitioners.

Payroll taxes

The 2% payroll tax cut from 2011 and 2012, which lowered employees’ Social Security payroll taxes, will expire, effective Jan. 1. Although the increase is on employee contributions, the increase also affects an employer’s withholding obligations, Morgenthaler and Wimer note. At the same time, they write, a new 0.9% Medicare payroll tax increase applies (from 1.45% to 2.35%) under the Patient Protection and Affordable Care Act on wages over $250,000 for married taxpayers filing jointly and $200,000 for single taxpayers. Again, though this increase is not an employer liability, employers must be prepared to withhold the additional 0.9% from wages for any employee with wages over $200,000.

Adoption assistance

The income tax exclusion for amounts paid by an employer under a qualified adoption assistance program is also set to expire on Dec. 31, Morganthaler and Wimer write. A qualified adoption assistance program allows an employer to reimburse an employee on a tax-free basis for as much as $12,650 in 2012 for expenses related to the adoption or attempted adoption of a child. Qualified adoption expenses include reasonable and necessary adoption fees, including court costs, attorney fees, traveling expenses and other direct adoption-related expenses.

Flexible spending account contributions

Under PPACA, employee contributions to health care flexible spending accounts will be reduced to $2,500 per year for plan years beginning in 2013, the attorneys note. This new limit must be documented in a flexible benefits plan by Dec. 31, 2014, regardless of the fiscal year of the flexible benefits plan, and this change must be retroactive to the beginning of the 2013 plan year.

Educational assistance

Certain reimbursements for employer-provided educational assistance will expire at the end of 2012. Section 127 of the Internal Revenue Code allows an employer to reimburse an employee on a tax-free basis up to $5,250 for certain educational expenses provided through a non-discriminatory educational assistance program. Even if employer-provided educational assistance programs no longer have tax subsidies in 2013, employers can still provide some type of educational reimbursements in a more limited manner if the educational reimbursements qualify as a business expense and meet certain requirements, such as enhancing the employee's performance but not qualifying the employee for a new position or career.

So, what now?

With the uncertainty of the approaching fiscal cliff, Morganthaler and Wimer write that employers should consider advising employees of the ambiguity surrounding educational assistance and adoption assistance benefits for 2013 and the possibility of a 2% payroll tax increase. Even if tax extensions for education assistance, adoption assistance and the 2% payroll tax increase are adopted in a new tax bill, the attorneys say employers should note that it is unlikely that the new limits on health care flexible spending accounts and/or the new 0.9% payroll tax increase for high-income employees will be altered or eliminated.


What you may not know about your FSA

By Jody Dietel
Source: Benefitspro.com

With fall just around the corner, benefits managers are gearing up to educate employees about flexible spending accounts for the open enrollment period. While benefits professionals may have a good handle on the tax-advantaged benefits accounts that can save participants up to 40 percent on health care, dependent care and commuting expenses, there’s still plenty about FSAs that benefit pros may not know.

Now is the perfect time for HR managers to keep details of FSAs top of mind and help employees understand the fine print so they recognize why enrolling this fall is the smart financial decision.

Eligible expenses for FSA users number in the thousands. You may be surprised at the breadth of products and services that are covered by FSAs. Participants can save big on a wide range of expenses: from dental and vision care with a health care FSA; and nannies and after-school care with a dependent care FSA. While we’re at it, don’t forget to elect your monthly commuter benefits: mass transit commuting expenses and parking for work. To explore a list of items that participants can purchase using an FSA, check outwww.savesmartspendhealthy.com.

Some eligible expenses may surprise you. While the most common covered expenses include co-pays, prescription drugs and dental and vision care, there are plenty of expenses often eligible for reimbursement that may come as a surprise.  They include acupuncture treatments; doctor-ordered weight loss programs; the additional costs of gluten free food items for those with diagnosed gluten sensitivity issues; mileage to/from medical appointments and smoking cessation programs.

FSA participants need to re-enroll each year. While many other benefits like health insurance do not require employees to sign up year after year, FSAs usually don’t include automatic reenrollment. Employees should look for FSA enrollment forms each year when they get their benefits package.

Contributions can occasionally be changed mid-year or opened after open enrollment. FSA contributions are not always set in stone.  A life changing event, such as a birth or death in the family, can sometimes allow participants to change the amount they decided set aside during open enrollment later in the year or start an account altogether.

The entire FSA contribution is available from day one. Unlike money from an employees’ annual salary which trickles in via paychecks every two weeks, FSA participants have access to the money they elect to contribute from day one. For families who face costly surprises early in the plan year, having the money available right off the bat can be a lifesaver.

FSAs contribute to an employers’ bottom line too. Just like participants, employers don’t have to pay payroll taxes on any of the money employees contribute directly to their FSA as opposed to receiving it in a paycheck.

FSAs are a great vehicle for employees to save hard-earned dollars. As we head into open enrollment, benefits managers helping everyone brush up on FSA details is an important step.