TN 46 (09-12)
SI 01120.230 Health Flexible Spending Arrangements (FSAs)
A. Introduction to health flexible spending arrangements (FSA)
Health flexible spending arrangements (FSAs), also known as flexible spending accounts, are an employer-established benefit plan used to reimburse employees for qualified medical expenses. An employee’s voluntary salary reduction agreement with the employer usually funds health FSAs. The employer may also contribute to the health FSA. Self-employed individuals are not eligible for health FSAs.
See information on salary reduction agreement in RS 01402.010 and cafeteria benefit plans in SI 00820.102.
B. Policy for health FSAs
For Supplemental Security Income (SSI) purposes, do not count health FSAs as resources because FSA funds are restricted to pay for qualified medical expenses. Employers ensure that health FSA funds are only used for qualified medical expenses. Individuals cannot use health FSA funds to pay for their own support and maintenance.
C. How to identify health FSAs
General criteria for health FSAs include the following:
Individuals must have an employer. Self-employed individuals are not eligible for FSAs.
To pay for medical expenses, employers issue debit cards, credit cards, and stored value cards to an individual for use with participating medical providers.
Employers may also reimburse individuals who file a claim for reimbursement or submit an Explanation of Benefits (EOB) showing the funds the employee owes to the medical provider.
Employees may use FSA funds for qualified medical expenses for him or herself, his or her spouse and dependents.
Employers do not deduct federal income taxes from the FSA contributions.
Employees do not have to report FSA reimbursements on income tax returns.
Employees lose FSA funds he or she does not use by the end of the year; this is known as the “use-it-or-lose-it” rule.
1. FSA contributions
Contributions to a health FSA plan may vary. Each health FSA plan sets a maximum amount or maximum percentage of compensation that can be contributed to the FSA.
For tax year 2013, contributions to a health FSA made through salary reduction are limited to no more than $2,500. After tax year 2013, the limit will be subject to a cost-of-living adjustment.
Individuals do not pay federal income tax or employment taxes on the portion of their salary they contribute or the amounts their employer contributes to the health FSA.
2. FSA distributions
For SSI purposes, health FSA distributions paid directly to the individual are not income. For more information on medical and social services, related cash and in-kind items, see SI 00815.050. For more information on cafeteria plans, see SI 00820.102.
Health FSA plans reimburse individuals for qualified medical expenses in three ways.
Debit cards, credit cards, and stored-value cards
Most FSA plans issue debit, credit, or stored-value cards to pay for qualified medical expenses. When individuals receive a card, they certify they will use the card for eligible medical care expenses for the individual, his or her spouse, and dependents. The issued card has the certification printed on the back. The individual also agrees to acquire and retain sufficient documentation for any expenses paid with the card, including invoices and receipts. Individuals can only use the card with merchants and service providers the employer authorizes. If the individual uses the card somewhere else or for another purpose other than a qualified medical expense, the merchant will reject the card or purchase. The card is automatically cancelled at termination of employment.
Explanation of Benefits
Individuals may also receive reimbursement by submitting to the health FSA administrator an EOB from a health insurance provider or a receipt from a merchant or service provider showing that he or she has an unpaid qualified medical expense. An EOB must clearly show the patient portion of any medical expense, the medical expense incurred, and the amount of the expense.
Alternatively, individuals may pay the merchant or service provider directly and submit a claim for reimbursement. The claim must include third party information supporting the claim and a written statement that the expense has not been paid or reimbursed under any other health plan coverage. The FSA cannot make advance reimbursements of future or projected expenses.
3. Balance in an FSA
Health FSAs are “use-it” or “lose-it” plans. This means that employees cannot carry over to the next year the amounts they contribute if they do not spend them by the end of the plan year or end of coverage, (whichever one comes first). Employers cannot refund any part of the balance to the individuals. Under most plans, the "coverage period" ends with the employees’ termination whether the individual or the employer initiated the termination unless the employee continues coverage with the company under the Consolidated Omnibus Budget Reconciliation Act (COBRA) or other arrangement.
4. Qualified medical expenses
Qualified medical expenses are those medical expenses specified in the plan that would generally qualify for the medical, dental, and vision expenses deduction. The Internal Revenue Service (IRS) Publication 502, Medical and Dental Expenses, explains qualified medical expenses. Some examples of qualified medical expenses include:
D. Procedure for developing flexible spending arrangements
1. Evidence indicates account is an FSA
Develop for a health FSA when an individual alleges owning an employer-established health benefit account. Request evidence that supports the account is an FSA. You may request one of the following:
an FSA account statement,
a current pay stub that shows the salary deduction going into the FSA, or
an FSA debit card that shows the printed certification on the back of the card.
Once you verify the account is a health FSA, accept the allegation of the health FSA balance. No further development is necessary. Record the health FSA in the Other Resources (ROTH) page in MSSICS and exclude the balance. For non-MSSICS cases, enter remarks stating the following: “Balance in health FSA is excluded.”
2. Evidence suggests the account is not an FSA
If the evidence shows the account is not an FSA, verify what type of account it is and process accordingly. For information on Health Saving Accounts (HSAs) and Medical Savings Accounts (MSAs), see SI 01120.235. For information on checking and savings accounts, see SI 01140.200. For other common investment vehicles, such as stocks and bonds, see SI 01140.220 through SI 01140.300.
RS 01402.038 Tax-Favored Health Plans
SI 00815.050 Medical and Social Services, Related Cash, and In-Kind Items
SI 00820.102 Cafeteria Benefit Plans