Understanding How Flexible Spending Accounts Work

Flexible Spending Accounts (FSA) are tax advantaged plans that allow the employee to pay for qualified insurance premiums, IRS 213d qualified expenses and qualified dependent care expenses on a before tax basis.

Key items to consider:

• Discrimination testing to see if the plan favors the highly compensated. Plans that fail discrimination testing will either need to reduce the amount the highly compensated contribute or, match some portion of the employee contribution to increase overall participation.
  
• Use it or lose it rule. The employee has a two and a half month grace period to use unused funds in their FSA from the prior year. Unused revert to the employer.
  
• Funds must be available at the start of the plan year (if an employee defers $200 per month--$2,400 per year-the full $2,400 must be made available to the employee at the start of the year. If the employee uses the full $2,400 in the first month of the year and terminates employment, the employer has no recourse in recouping funds from the ex-employee).
  
• Employers must file IRS Form 5500.
  
• In general, the employee can contribute up to $5,000 annually into a FSA.