Health Care FSA: What does and doesn’t qualify?

When are carryover funds available for a new FSA member?

For new FSA members, there are two carryover fund options to take note of: Healthcare to Healthcare and Healthcare to Limited Purpose. Here they are followed:

Healthcare FSA to Healthcare FSA carryover

As of December 31, any funds up to $570 remaining in a Healthcare FSA will immediately carryover on the first day of the new plan year. This means that the carryover amount is simultaneously available to pay previous plan year expenses and current plan year expenses during the previous plan year run-out period.

Healthcare FSA to Limited Purpose FSA carryover

Remaining carryover funds in a Healthcare FSA as of December 31 can only be used for previous plan year dates of service until the end of the plan run-out period. Any dental or vision expenses incurred during the new plan year can be reimbursed either immediately from the new Limited Purpose FSA, or at the end of the run-out period when any remaining funds from the previous Healthcare FSA are carried over to the Limited Purpose FSA.

Health Care FSA: What does and doesn’t qualify?

Dependent Care FSA: 5 Important Facts

A Dependent Care FSA, or DCA, is a flexible spending account that allows employees to contribute to a portion of their paycheck, pre-tax, to pay for qualified dependent care expenses. Here is a list of five facts regarding this account.

Fact #1: Any participant of this account can enjoy a 30% average tax savings on the total amount they contribute to a DCA.

Fact #2: Contributing money to this account starts by first making an annual election during open enrollment. From there, your employer will deduct the election amount from your paycheck before taxes are assessed in equal amounts throughout the year.

Fact #3: You can contribute up to the IRS limit of $5,000 annually on income tax returns if filing single or married jointly. If married and contributing to an account separately, you can contribute up to $2,500 each, or $5,000 total.

Fact #4: Eligible expenses for a DCA must be for the purpose of allowing you to work or look for work. Services may be provided at a child or adult care center, nursery, preschool, after-school, summer day camp, or a nanny in your home.

Fact #5: There are two methods to use funds in a DCA. One option is paying directly from your account through a benefits debit card (only if your care provider accepts credit cards). The second option is paying out-of-pocket and then file a reimbursement claim with your expense documentation.

Health Care FSA: What does and doesn’t qualify?

Can HSAs provide tax-free reimbursement for the same expenses as Health FSAs?

Question: Our company currently offers a general-purpose health FSA. If we switched to an HDHP/HSA, could our employees receive tax-free reimbursements for the same types of expenses from their HSAs?

Answer: Yes, and they might acquire a few additional options. Like health FSAs, HSAs can provide tax-free reimbursement of out-of-pocket expenses for medical care. But HSAs also can reimburse certain expenses that health FSAs cannot. Those differences are highlighted below.

  • Nonmedical Expenses: Unlike health FSAs, HSAs can make distributions at any time and for any purpose, although only distributions for qualified medical expenses are tax-free. Some taxable distributions may also be subject to a 20% excise tax.
  • Insurance Premiums: While HSAs generally cannot reimburse health insurance premiums or coverage contributions on a tax-free basis, there are a few exceptions:
    • Qualified long-term care insurance
    • Any federally required continuation coverage (e.g., under COBRA or USERRA)
    • Health plan coverage while the HSA account holder is receiving unemployment compensation under state or federal law
    • For HSA holders who are age 65 or older, any health insurance other than a Medicare supplemental policy
  • Qualified Long-Term Care: Unlike health FSAs, HSAs can reimburse qualified long-term care services on a tax-free basis.

In addition, HSAs cannot limit the types of expenses that are reimbursable on either a taxable or tax-free basis because they are individual trusts to which account holders must have unrestricted access, subject only to reasonable restrictions on the frequency or minimum amounts of distributions. HSAs are also different in terms of whose expenses they can reimburse tax-free. Health FSAs can provide tax-free reimbursements for the expenses of employees’ children who are under age 27 at the end of the taxable year, regardless of their status as tax dependents. However, HSAs can only provide tax-free payment or reimbursement of the expenses of an HSA account holder’s child if the child qualifies as a dependent. Keep in mind that other requirements (e.g., regarding substantiation of expenses) will also apply and may vary from arrangement to arrangement.

Source: Thomson Reuters

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