There are a few critical rules that are important for every participant in an FSA plan to understand. To be an educated and informed consumer, it’s important to fully understand the benefits and the challenges to realizing some great tax-savings. This could mean quite a few extra take-home dollars for your family, and in these hard times, we know that every penny counts.
We’ve gone over many of the benefits that both employers and employees can experience when participating in a Flexible Spending Plan, and now we’re going to cover some of the things we call “The Catch.” The fact is that there is an inherent risk to cafeteria plans for both employer and employee.
- For Employees the IRS has 3 rules:
- You must sign up before the plan year begins
- You cannot change your election amount for an entire plan year unless you have a Qualified Family Status Change.
- If you do not submit valid claims equaling the amount you elected, you will LOSE THE MONEY.
- For employers the risk centers on something known as the uniform premium provision. This states that the full annual election of a health FSA participant must be available on each day of the plan year.
This is a long disliked and long standing provision in FSA plans known as the Use-it-or-Lose it Rule. This rule states that any money you put into the plan that is not used for eligible expenses is forfeited. No one wants to forfeit any of their hard earned money, so how can you avoid this potential trap? One way is to map out your expenses so you can have a better idea of what your family is spending for health or dependent care. You can click here to visit a calculator that can help you estimate expenses. It is important to realize that the benefit of a Cafeteria Plan is to save on expenses you are sure you will have. If you know that you (or someone in your Tax-Family) is going to incur X amount of expenses in maintenance medications (monthly Rx), or visits, even annual dental visits or purchases of glasses and eye examinations, you can use this information and enter it into the calculator. The calculator will give you a total estimated amount and then gives you the option to round that number down by 10-20%. If you’ve never participated in an FSA plan before this reduction is like a buffer zone between you and the Use-It-or-Lose-It.
In addition to using the calculators, which helps to get a general picture of annual expenses, the IRS has allowed for a Run-out or Extension period. This is an additional 2 months and 15 days in which claims can be physically incurred after the end of the plan year. Previously, if there were funds remaining in a participant’s account at the end of the plan year, and no services within that plan year to apply against those funds, the money was automatically forfeited because of the Use-it-or-Lose-it rule. Now many of our plans allow for this Run-out period, which really softens the rigid guidelines of the plans. So if the plan year has ended, and you still have not used up all your funds, you still have a while to incur those services and access the money in your account. This is true as long as your plan documents are written to include the new language. Check your Summary Plan Description to see if you have the extension period. (You can find your SPD by logging into the secure part of the website and clicking on the Documents navigation button). This is also softened by the Uniform Premium Provision which will be discussed in more detail below.
Use the calculators – to help you to determine how much money you should put into the plan. The calculators give you a better picture of your annual expenses. Many people find that they are surprised at how many health care related expenses they have!
Know your balance – This important step can really help you to plan out the best use of your funds. By knowing your balance, you know how much you have remaining to use and you also know the time frame in which it can be used. You can always give us a call during business hours and a representative will be able to assist you in obtaining balance information. Even better is to use our secure website to view all your claims and payment histories. If your company offers the FSA debit card, you will be able to view all your card transactions and even repay ineligible swipes online.
Get that treatment you’ve been putting off! – Have you been putting off that dental work, or maybe getting a new pair of glasses? We’ve all needed services that we put off until a better time. Well, if you’re running up against the Use-It-or-Lose-It deadline, this may be just the time to get those services or items you’ve needed.
Get a massage! Did you know that alternative therapies like massage and acupuncture can be qualified expenses? Well they can! While it is true that a massage for relaxation or a day at the spa would not qualify as medical expenses under the plan, a massage to relieve back pain or muscle tension would certainly be a valid expense. Since the massage is treating a specific condition, it would be eligible under the guidelines of most FSA plans. To submit the expense for reimbursement, you must have your therapist write on the receipt that the massage is treating X condition (back pain, muscle tension, sciatica, carpal tunnel syndrome, etc.). The condition must be named on the receipt for the expense to be considered valid. You can also complete our Generic FSA Ready receipt and have your therapist sign it for verification. A few massages may eat up that remaining balance.
Once you have gone through the steps to figure out any annual expenses, that amount is used to make the “election.” This is the amount that will be payroll deducted to pay for medical and dependent care expenses. It is important to choose this number carefully because after the plan year begins, you are locked into that election for the entire plan year. This means that the amount cannot be reduced or increased after the initial Open Enrollment period has ended. The Open Enrollment period is usually the 30-day period before the plan year begins. Once the plan year begins, no more elections to participate into the plan can be accepted, nor can requests to drop from the plan be accepted. The exceptions to this rule would be for a participant who experiences one of the IRS defined “Family Status Changes.”
This is the inherent employer-risk in a cafeteria plan. The Uniform Premium Provision states that the full balance up to the annual election amount must be available to employees for eligible medical expenses on each day of the plan year.
Take for example, an employee with an annual election of $1200 ($100 each month in payroll deductions). Now say this individual has his first eligible expense about three months into the plan year. At this point the employee has payroll deducted $300 into the plan. The employee has a hospital visit charge for $1500 at this point and submits the entire amount to the FSA plan for reimbursement.
Because of the Uniform Premium Provision, the FSA must reimburse the plan participant’s expenses up to the full amount of the eligible election. So in this case even though the employee has only payroll deducted $300 into the plan so far, and even though the hospital’s bill is for $1500, the plan would reimburse the participant a total of $1200. The participant would continue to make his monthly payroll deductions so that at the end of the plan year, the account would balance because there were $1200 in reimbursements and $1200 in payroll deductions.
The risk to the employer comes when a plan participant terminates employment before repaying into the plan all reimbursement. So if the above employee terminates employment 6 months prior to the end of the plan year, this employee has been paid out a total of $1200 already, but has only contributed $600 into the plan so far. In this situation, there is no remedy for the employer to recover the loss, and that is the inherent employer risk in the medical FSA plans. The employer cannot ask for this money back, adjust W-2 wages after the fact, nor can it payroll deduct any overage from the final paycheck.
The IRS does not require a cap or limit on the amount that a participant may put into an FSA, however because of the UPP, we write all of our documents with a cap amount to help mitigate this employer risk down to a specific level. The employer chooses this amount, and we can advise your company what a good limit would be to use in your given circumstances. Another mechanism that reduces the blow to employers from the UPP is the Use-It-or-Lose-It rule. Since some employees forfeit money into the plan because they did not have enough in eligible expenses, that forfeited money can be used to cover any losses due to the UPP. If there are no losses from the UPP to apply the money forfeited from plan participants, then the money can be used by the employer to pay for the administrative services or even to be disbursed evenly on a taxable basis to the active plan participants.
DCAP & PIH pay out only to contributions YTD
Unlike the Medical Expense Reimbursement part of the plan, the accounts for Dependent Care Reimbursement and Private Individual Health Insurance Reimbursement will only pay a participant up to the amount that has been payroll deducted to date. So let’s use an example similar to the above; an employee with an election for $1200 in dependent care expenses that has $300 in payroll deductions to date.
If this participant submits a bill for $1500 to the FSA administrator, our software will know that there are valid claims for $1500, but that it can never pay more than the annual election, so it knows it will not pay more than $1200. It also checks to see how much has been contributed into the plan to date, since it knows for this account, it can only pay up to that amount. So the system will cut a reimbursement for $300 to the employee, and it will also hold the remainder of the valid claims in cue, to wait for future payroll deductions. As payroll deductions are made into the plan, our system will automatically cut reimbursements back to the plan participant. Since this person had enough in valid expenses to clear the entire election in a single claim, that person will not have to submit any more claims for the remainder of the year.
(This works the same way for the PIH accounts, so if you have an individual insurance policy not purchased through any employer or group plan, then your reimbursements work the same way.)
The IRS has ruled that changes to participation and election amounts can only be made in connection with one of the following Family Status Changes. The change must be made in writing within 30 days of the Family Status Change and must also “make sense.” For example, if a participant experiences a marriage, an election change increasing the medical election to allow for the new spouse’s medical expenses would be allowed since it makes sense that the employee’s tax-family’s expenses have increased.
There are two special types of status changes. For dependent care accounts an election change is allowed to reflect changes in provider rates, or school-year changes (i.e. going from daycare which is reimbursable to kindergarten which only before and after care qualify in addition to days off school.)
For Private Individual Insurance Reimbursement accounts, if the premium rates change an election change that reflects the price change can be allowed.
The Family Status Changes that allow for an election to be made, changed, or terminated include:
- Birth
- Death
- Adoption
- Marriage
- Divorce
- Court Order regarding custody or financial responsibility changes for a child
- Change in Spouse’s coverage or eligibility
- Change in dependent Status
If you would like to make an election change and you feel that you have experienced one of the above family status change events, please contact our offices at 954-983-9970 and we can help you determine your eligibility for an election change. To make this change you will need to complete a Change of Status Form and a new Election Form.
Submitting claims after termination or plan year end
There is a deadline for submitting claims if you have a balance remaining after your plan year has ended or after your date of termination. If you have terminated employment, and still have money left in your FSA account, you have 90 days from the date of termination to submit receipts. These receipts must have a date of service on or after the first day of your current plan year and not after your date of termination. So any qualifying expenses you had during the plan year while you were still employed would be eligible for reimbursement. You cannot submit receipts with dates of services after your date of termination. If you have not yet incurred any expenses and want to access the funds in your account to avoid losing the money, you have the option to continue your FSA after your termination through COBRA. If you would like to do this, please contact our offices and we can assist you in determining if you are eligible and how to proceed.
If your plan year has ended and you have money still in your account, you have 90 days to submit all receipts with dates of services within that plan year. Some of our plans have an extension period which allows for an extra 2 months and 15 days to incur expenses after the ending of the plan year. See your summary plan description for more information. (Click here for instructions on how to download your SPD). After 90 days from the end of the plan year, no more expenses incurred during that prior plan year will be reimbursed.
