Healthcare Flexible Spending Accounts, or Healthcare FSAs, are a popular way to provide a tax advantage to your employees. That's likely why you're offering this plan. However, when employees don't understand their plan, they typically go to their employer for guidance.
We sat down with Tricia Voigt, Section 125 compliance specialist, to discuss some top areas of confusion. For almost two decades, Tricia has worked alongside employers to help with plan setup and valuable education.
“The Internal Revenue Code is confusing. But I’ve seen that when employers understand the basics of FSAs, their employees have a smoother time using their funds,” says Tricia.
To help your employees understand how the plan works and best utilize their accounts, consider these tips.
When can claims be submitted by my employees who participate in the plan?
Claims can be incurred and submitted on the first day of your plan year. For example, if your employee incurs an eligible claim on day one of the plan year, the claim can be submitted for reimbursement, even if the claim amount is equal to the employee’s full annual election amount.
What expenses are eligible and where may funds be spent?
Your employee's Healthcare FSA will cover a variety of eligible medical expenses.
Why would a claim be denied?
Claims may be denied because:
- Documentation is missing,
- The expense is not for an eligible plan participant,
- The expense is not within the plan year, or
- It's an ineligible expense.
If this happens, a participant may either need to submit documentation with expense details showing it is eligible, or submit a claim for an expense that is eligible.
What is the employees' responsibility in providing Benefits Debit Card documentation?
Internal Revenue Code Section 125 Plan regulations state that all reimbursement account expenses must be substantiated. The substantiation may come in the form of a receipt or Explanation of Benefits (EOB) from a medical provider. The purpose of substantiation is to verify:
- The expense is eligible under the employer’s Section 125 Plan,
- The expense is for an eligible plan participant, and
- The purchase was made during the participant’s plan year.
How does “use or lose“work?
Healthcare FSAs are “use or lose” accounts. This means, at the end of the plan year, the funds remaining in your employees' accounts may be forfeited and returned to you, the employer.
A few months before the end of your plan year is a good time to remind employees that they must use their Healthcare FSA account balance before the end of the plan year or the end of the grace period, whichever is applicable, or they may lose any unused funds. If the plan includes a carryover, they may carry over up to $500 into the new plan year.
Below are a few tips on how to use remaining funds:
- Schedule routine appointments.
- Request prescriptions for over-the-counter medications.
- Review receipts to make sure all eligible expenses were submitted for reimbursement.
- Review vaccination records to see if flu vaccines or childhood immunizations are needed.
Do I automatically have the runoff period on my plan?
The runoff period is the amount of time a participant can submit claims and documentation for expenses incurred during the plan year that just ended, and, if applicable, claims incurred during the grace period. You can confirm if your plan has a runoff period by reviewing your plan document.
What happens if I elected the grace period? Can I change it?
If you have elected a grace period, employees will have 2.5 months following the end of your plan year to incur Healthcare FSA claims for the previous plan year’s account balance. If you want to add or remove the grace period option, you’ll need to amend your plan document.
What happens if I elected the carryover? Can I change it?
If you have elected a carryover, your participants may carry over up to $500 of unused Healthcare FSA contributions to the next plan year. The money may be used to reimburse eligible medical expenses incurred throughout the following plan year. Like the grace period, if you want to add or remove the carryover option, you’ll need to amend your plan document.
One reason employers remove the Grace Period and/or the Carryover is when they’re considering adding a Health Savings Account (HSA). Both provisions could affect an employees’ eligibility for the HSA.
To avoid any mid-year issues, it’s best to create your strategy before the plan year begins and implement any plan changes during the renewal period.
Can my employees make mid-year election changes?
Section 125 Plans must follow the general rule that participant elections are irrevocable for the plan year. A change in an employee’s benefit election may generally be made only prior to the beginning of each new plan year during the annual enrollment period. The purpose of this rule is to ensure employees are not permitted to have control over their wages after the amounts are earned. Such control would result in the tax concept of “constructive receipt” and employees would have immediate taxable wages. The IRC regulations allow some narrow exceptions to this irrevocability rule, if certain conditions are met.
You may permit these exceptions for mid-year election changes in your Section 125 Plan, or you may restrict changes. The determination to allow a mid-year election change for any employee remains with you.
American Fidelity offers ongoing employee education to help make managing reimbursement accounts easier. In addition, we provide videos, a Section 125 calculator, an expense worksheet, and FAQs on our support pages.
Tricia Voigt, Section 125 Compliance Specialist
Tricia Voigt is a Section 125 compliance specialist with over 17 years’ experience in setting up S125 plans for employers and helping keep the plans compliant. Tricia reviews regulations and works closely with legal and compliance attorneys to interpret legal regulations and apply it to our customers. Tricia is a member of Employers Council on Flexible Compensation and has earned the Certified in Flexible Compensation designation.