Flexible spending account rules

IRS rules decide when the money in a health FSA or a dependent care FSA is available, what it can pay for and what happens to what’s left at the end of the plan year. They apply to the FSAs an employer offers its employees through a cafeteria plan.

When the money is available

Each employee chooses how much to contribute at the start of the plan year, and the employer takes it from their pay through the year. An employee can change or revoke the election only when the law and the plan allow it. A health FSA follows the uniform coverage rule: an employee’s whole election for the year is available at any time during the coverage period, however much they’ve contributed so far. The amount available includes anything the employer contributes, less what the FSA has already paid them. An employer can’t speed up what it takes from an employee’s pay because of the claims they make. The uniform coverage rule applies only to health FSAs. A dependent care FSA can limit what it pays to what the employee has contributed so far, less what it has already paid them.

What an FSA pays for

A health FSA pays for the medical expenses its plan covers. The IRS bases them on the medical and dental expense deduction, which IRS Publication 502 explains. Over-the-counter medicine and menstrual care products also count, but health insurance premiums, long-term care and expenses another health plan covers don’t. To be paid back, the employee gives the health FSA a written statement from an independent third party showing the expense and its amount, and a written statement that no other health plan has paid it. A health FSA can’t pay an expense in advance. A dependent care FSA pays for a qualifying person’s care so the employee can work. A qualifying person can be a dependent child under 13, or a spouse or another dependent who can’t care for themselves and lived with the employee for more than half the year. A dependent care FSA’s requirements closely follow the tests for the dependent care credit, which IRS Publication 503 explains. Overnight camp doesn’t count, and neither does tuition for kindergarten or a higher grade. Each kind pays only for its own expenses: a health FSA can’t pay for dependent care, and a dependent care FSA pays only for dependent care.

What happens to unused money

FSAs are use-it-or-lose-it plans: money left at the end of the plan year is forfeited, unless the plan offers one of these:

• A grace period of up to 2½ months after the plan year ends, through the 15th day of the third month. Expenses incurred during it can be paid from what was left. It can cover a health FSA or a dependent care FSA, and it applies to every participant.
• A carryover, for a health FSA. Unused money can pay the next plan year’s medical expenses, up to a limit indexed for inflation that the IRS gives for each year in Publication 969. The plan can set a lower limit, which applies to every participant alike, and anything over it is forfeited.

A health FSA can’t have both. An employer adds either one by amending its cafeteria plan document by the end of the plan year whose money it applies to. A plan can also have a run-out period after the plan year, when employees can still send in claims for expenses from that year. The employer can’t refund unused money or pay it out in another form. One exception is a qualified reservist distribution: a health FSA plan can allow one for an employee called to active duty as a reservist. When an employee leaves, what’s left in their health FSA is forfeited, unless they elect COBRA continuation coverage for it.

In Every

Company Admins and HR Admins set up a Health FSA or Dependent Care FSA on Benefits after your company finishes onboarding and payroll is set up. Setup asks for a start date and the company’s annual contribution (see Financial benefits). Each employee chooses their own yearly amount on My profile → Benefits, and can’t change an FSA election there once they’ve enrolled (see Enroll in financial benefits). The employee guide to FSA rules explains the same rules to employees. When an employee enrolls in a Health FSA, Every adds their whole yearly election, plus the company’s contribution, to their balance. A Dependent Care FSA’s balance grows as each regular payroll adds its contributions. An employee can’t claim more than their balance.