Basic Rules of FSAs
Here are some of the basic rules for flexible spending accounts:
- An employee must choose how much to put in the account at the beginning of
the year (although all of the money does not have to be contributed at the
beginning of the year).
- The account may not establish a premium payment schedule based on the rate
or amount of claims incurred.
- The entire amount the employee has elected to contribute for health care
expenses (less any amounts previously reimbursed) must be available at all
times to reimburse expenses.
- Failure to pay premiums, however, will terminate flexible spending account
coverage and any claims incurred after the date of termination will not be
eligible for reimbursement.
- $5,000 is the maximum that an employee can contribute in a calendar year
for either a dependent care FSA, or a health care FSA.
- Some FSAs establish a minimum that must be met before a claim will be
paid, such as $25 or $50.
- If there is a balance left in an individual employee's flexible spending
account at the end of the year, it is forfeited (known as the
use-it-or-lose-it policy); forfeited funds may be used by the employer to
offset future administrative expenses.
- The plan administrator should allow 90 to 120 days after the end of the
year for participants to submit claims.
- The plan need only pay claims that are incurred during the plan year; the
administrative system you set up must be able to distinguish between claims
made in one year for expenses in the previous year and claims made in one
year for expenses in that same year.
- If someone who participates in the account is entitled to COBRA benefits,
and that person elects to continue as an account participant, you would have
to continue to honor the claims and accept the payments.